Production and Cost

Economics
Tutor: None Selected Time limit: 1 Day

What is the law of diminishing marginal productivity? How does the law of diminishing marginal productivity affect the cost of productions? Provide an example from your workplace. 

Sep 4th, 2015

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"Law Of Diminishing Marginal Productivity"  is an economic principle that states that while increasing one input and keeping other input at the same level may initially increase output, but  further increase in that input will limited effect on output or might be no effect or negative impact on  output.

It also helps to explain why production is not always the best way to increase profitability.  Therefor the cost of production increased after a certain limit and after that there will be no profit.

   As an example, let’s consider a pizza restaurant that wants to increase profitability. Increasing the amount of cheese (the input) that goes on each pizza can create a more delicious product and sell more pizzas. But at some point, the pizza reaches an optimal cheese level. The amount of cheese must be balanced with the crust thickness, amount of sauce and other pizza toppings, if any. If the restaurant continues to add more cheese to the pizza beyond the optimal level, its sales will decline because customers will not enjoy pizzas that leave them with a mouthful of cheese and little else.

If the pizza restaurant wants to continue to increase its profitability after optimizing the amount of cheese on its pizzas, it might look at increasing a different input, such as pepperoni or sausage, or adding another product, such as chocolate gelato.



  

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Sep 4th, 2015

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