Here is a very general statement of the law of diminishing returns:

The law of diminishing returns: As any activity is extended, it eventually becomes increasingly difficult to pursue the activity further.[1]

For example(:?), the faster you drive, the more gas your engine burns per mile, and it becomes ever harder for your car to accelerate another 10 miles per hour.

Diminishing returns are encountered in many areas, including physics and biology, and the law of diminishing returns has wide and varied applications within economics: Expanding any type of production eventually becomes ever more difficult and costly. Increasing your total satisfaction from any good ultimately becomes harder the more of the good you have already consumed. Would four candy bars daily quadruple the enjoyment you got from eating the first?

Increasing Opportunity Costs

Diminishing returns are inevitably encountered in all forms of production and generate increasing opportunity costs.

The principle of increasing costs: Repeatedly increasing output by some set proportion ultimately requires more than proportional increases in resources, and thus, higher costs.

For example, studying tends to improve your grades–a C requires more effort than a D. But boosting a B to an A is usually much harder than moving from a D to a C. Thus, raising your GPA entails increasing costs. Let's apply this concept to the production possibilities frontier.

 

Atilla's "balanced" technology mandated identical resource mixes for all outputs. Suppose he appointed you production minister. You might reason that, relative to arms, efficient bread output requires more land and less capital, while arms should use relatively more capital. Your insight is a technological breakthrough! Both outputs can grow! After tinkering to find the most efficient resource mixes, increasing costs are encountered as each form of production is expanded, so the production possibilities curve is concave (bowed away) from the origin. Here's why(:).

 

Tyrania's production possibilities frontier with this new technology is shown in Figure 3. When bread production is raised from zero to 200 boxcars daily, machine gun output falls only from 1,000 units to 980 daily (from point a to point b). Why do the first 200 boxcars of bread cost only 20 machine guns? Because the first resources shifted into food production will be those relatively best suited for bread and least suited for weapons. Far more land than capital will be transferred to bread production. But as bread output is continually increased, the resources shifted are less and less suited for bread production relative to production of armaments, and the cost of extra bread rises. Thus, moving from point b to point c yields an extra 200 boxcars of bread daily, but costs 53 machine guns, while moving from point c to point d also yields 200 extra boxcars of bread, but the cost is higher: 117 machine guns.

 

When bread output finally grows from 800 to 1,000 boxcars daily (point e to point f), the last few resources shifted from armaments are well suited for producing guns but not for producing food. Thus, 600 machine guns are sacrificed for the last 200 boxcars of bread. Less and less land is available for shifting, so more and more capital moves into farming. Note that the slope of the production possibilities frontier reflects relative production costs: As more and more bread is produced, the production possibilities curve becomes ever "steeper" and bread becomes increasingly costly relative to machine guns. The ever-rising cost of extra bread in terms of forgone machine guns, as shown in the table in Figure 3, is graphed in Figure 4. You will learn in the next chapter that this shows the typical shape of a society's long-run supply curve for bread.

 

To summarize, PPF models illustrate scarcity, choice, opportunity costs, and diminishing returns. Our wants are boundless but limited resources permit only limited production. Scarcity compels choices, so we face opportunity costs. Finally, opportunity costs eventually rise if any type of production is repeatedly expanded.

 

 

A More Realistic PPF that Reflects Increasing Costs

Rising Opportunity Cost of Bread

 

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