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Production with one variable input: stages and diminishing returns sheet
Essay frame

Explain the law of diminishing returns and the three stages of production. Why does a rational firm operate in Stage II?

How to lay out the answer. Follow the frame, then write it in your own words.

  1. 1 · Define the production function and the short run. Q = f(L, K); in the short run at least one input is fixed.
  2. 2 · Define TP, AP and MP. AP = TP ÷ L; MP = ΔTP ÷ ΔL.
  3. 3 · State the law with assumptions. Fixed input, constant technology, identical units of the variable input.
  4. 4 · Show a schedule. TP 10, 30, 54, 72, 85, 90, 90, 84; MP peaks at 24 and turns negative; AP peaks at 18.
  5. 5 · Draw the curves and mark the stages. [Diagram: TP curve above; AP and MP curves below; MP cutting AP at its peak; MP = 0 under the TP peak; Stages I, II, III marked]
  6. 6 · Explain each stage and why Stage II is rational.
    • Stage I: fixed input under-used, keep adding labour
    • Stage III: negative MP, cut labour
    • Stage II: the economic region
  7. 7 · Sri Lankan business link. Tea estates with fixed land decide how many pluckers to hire using this logic.
  8. 8 · Conclude. Diminishing returns limits short-run output and explains rising marginal cost.

Scoring tip: Draw the TP diagram directly above the AP/MP diagram with the same horizontal axis, so the stage boundaries line up.