The law of diminishing returns states that “As additional units of a variable factor are added to a given quantity of a fixed factor, with a given state of technology, the marginal product and the average product of the variable factor will eventually decline”. This law comes about because each unit of the variable factor has less of the fixed factor to work with.
The law of diminishing returns predicts the consequences of varying the proportions in which factors of production are used hence the alternative term, “the law of variable proportions.” The law of diminishing returns characterizes the short – run period of production where at least one factor of production cannot be varied.
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