Cost of production: Production function and law of diminishing returns
Channel: Werner Lost
Date: 2012-01-04

Inputs can be divided into fixed and variable inputs.  The production functions shows how inputs are changed into outputs.  In the short run fixed inputs are unchanged while variable inputs change.  

The law of diminishing returns plays a central role in determining the cost of production for any kind of business. To understand the cost of production, you first need to understand the law of diminishing returns.

The law of diminishing returns states that, as more of a variable input is used, while all the other inputs are being kept the same, each additional unit of the variable input will eventually produce less and less additional output. In other words, the marginal product of the variable input declines. The law of diminishing returns is, therefore, also known as the law of variable proportions.