The Law of Diminishing Marginal Returns

This law is reflected in a declining marginal product of the variable input as well as an increasing marginal cost incurred in the production of the output. Because the productivity of the variable input declines, more is needed to generate a given increment in production. This means the cost of producing more output, marginal cost, increases with the quantity produced. As cost increases, so too does price. The direct correspondence between higher price and larger quantity is the essence of the law of supply.

A Word or Two About the Long Run

Because none of the inputs under control of a firm are fixed in the long run, the law of diminishing marginal returns does not apply. Instead, production in the long run is guided by returns to scale, which reflects how production changes in response to proportional changes in all inputs, especially labor and capital.

The End of the Short Run

For some types of production the short run can last as short as a few days or weeks. For other production it can last as long as a decade or more. The short run can last as long as it takes to expand the fixed input.

A couple of examples might serve to illustrate:

• Consider the newspaper route tended by precocious twelve-year-old Penelope Pumpernickel. In the short run, her key variable input is her own labor and her most important fixed input is her shiny purple bicycle. In the short run, Penelope can deliver more newspapers by spending more time doing the delivery deed. In the short run, her shiny purple bicycle constrains how many papers she can delivery.

  However, in the long run precocious Penelope can change her fixed shiny purple bicycle input. Perhaps she can add a second bike to her newspaper delivery production enterprise to be used by her precious younger sister Priscilla. Perhaps she can expand her capital with a moped, a motorcycle, or a brand new OmniMotors LTD DXL 5000 Delivery Van.

  How long might it take Penelope to acquire this extra capital and move from the short run to the long run? Perhaps a day or two if the bicycle is purchased off the floor from a retailer or a month or so if it is manufactured from scratch. In this case, the short run lasts less than a month.



• Another example is provided by Mona Mallard's Duct Tape factory. This 3 million square foot factory makes use of the latest automated, high-tech duct tape manufacturing equipment, with key parts fabricated out of quagliminium, a rare metal found only in the barren mountains of the Republic of Northwest Queoldiolia. It takes a minimum of five years to extract and process quagliminium into a usable form.

  How long would it take to expand the productive capital of Mona Mallard's Duct Tape factory? Given the time constraints for quagliminium processing, Mona Mallard can count on at least five years. Should Mona decide to expand duct tape production by adding another 300,000 square feet of factory space and associated equipment today, she will not see any extra output for at least five years. In this case, the short run is at least five years.

All Runs Together

However in the real world, firms are generally less concerned about such theoretical distinctions between the short run and the long run. The reason is that most firms operate in the short run and long run (as well as the very short run and very long run) simultaneously. In other words, a firm is concerned about the day-to-day business of adding variable inputs to fixed inputs, at the same time it is making and implementing plans to change the fixed inputs.