Question

Mention two causes of decreasing returns to a factor.

Explain two causes of decreasing returns to a factor.

Discuss any two reasons for the operation of diminishing returns to a factor. 

Answer 1

Two causes of decreasing returns to a factor are:

• Disturbing the Optimum Proportion: When we add more workers to the same fixed resources (like machines), the machines are used more efficiently. However, this approach only works up to a certain point. There is an ideal combination of workers and machines - for example, 5 workers for 5 machines.
  If we add more than 5 workers, there won’t be enough machines for everyone to use properly. This creates an imbalance and reduces the efficiency of all workers, which leads to a decrease in output per worker (a fall in average and marginal product). 
• Imperfect Substitutability of Factors of Production: Labour and capital (like machines) are not perfect substitutes. In some cases, we can use more workers instead of machines, but only to a certain limit. After that, just adding more labour cannot replace the role of machines effectively. Because of this limit, diminishing returns happen, where adding more labour gives less and less additional output.