What is the law of diminishing returns and how does it affect production costs?

What is the law of diminishing returns and how does it affect production costs?

The law of diminishing returns states that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease. This means that after a certain point, each additional unit of the variable input will contribute less to the total output.

In terms of production costs, the law of diminishing returns affects them by increasing the average and marginal costs. As the marginal product of the variable input decreases, the cost of producing each additional unit of output increases. This is because more resources are required to produce the same level of output, leading to higher costs per unit. Therefore, the law of diminishing returns leads to an increase in production costs.