Diminishing Marginal Returns (Essay Sample)

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Diminishing Marginal Returns Firms are meant to produce various products and services that they supply to their clients that are situated in various parts of their target markets. Production means that these firms have to incur numerous costs that are valued in monetary terms implying that the firm has to part with a given amount of money to cater for the same (Rittenberg 74). The reason the firm pays for all these costs is to realize the set returns after selling the products in question. Production activities require numerous inputs that include labor and capital that makes the production process possible.
It is evident that when a firm increases the amount of resources there is a high likelihood of increasing the scale of production both in the long run and the short run. The management of each firm is set out to ensure that the available resources inform of labor and capital are combined in the best ration to ensure that the scale of production is what is expected (Hall and Marc 136).
In the short-run, it is quite difficult for the management to alter or change all the requirements for production since others remains fixed over this period. This period is usually short thus implying that it is hard for the management to effect the necessary mechanisms that can result into full blown production activities. Capital is usually fixed during the short run since assets like buildings cannot be varied or altered at this juncture thus implying that the level of production is limited to that effect (Boyes 63).
In the long-run, the firm has all the mechanisms at its disposal to ensure that the level of production is as expected by the management. During this period, all the costs of production become varied since the firm can alter the input mix that can lead to the expected production levels. The firm has the techniques and time to adjust its production capacity by acquiring the factors of production that it feels are necessary to enhance the same. Boyes and Michael (75) observes that management can alter the number of laborers required to complete a given task as well as altering the amount of capital that they have to work with at each production exercise.
The concept of diminishing returns comes in to help the producers and manufacturers to take care of their production activities to ensure that the whole process becomes a success. It is evident that most of the producers try to increase the production capacities of their plants by varying the input mix to ensure the same. To realize increased levels of production, the firms tend to increase either the amount of capital or the number of workers or both of the two inputs (Besanko et al., 79). The increase of capital is meant to increase the amount of the available capital stock that employees have to work with to increase the levels of output that is taken to the market. In the event that the available capital stock is more than what the current number of workers can work with, the company shall tend to hire additional workers to reach the required number.
Arnold (30) argues that the firm will produce the amount of products that have to be taken to the market up to a level where the production of an extra unit leads to declining results. It implies that the production of additional products due to the increase in the level of factors of production shall increase steadily up to a level where addition of one unit of factors of production shall lead to negative results or shall produce less than the previous one. The firm will be informed by such a scenario since it has to experience increasing returns and not the diminishing ones (Boyes and Michael 89). When the returns start to diminish, the cost of production becomes unnecessarily high since the hired individual or resource may fail to replicate the productivity that the previous one portrayed (Boyes 72). It means that the firm shall stop hiring additional employees at a point where marginal cost equals to the wages that the additional employee is entitled to. The same idea shall apply to the use of capital where the firm shall be keen to add its capital stock to the point where the cost of adding additional capital equals to the marginal productivity of it does implying that any additional stock of capital shall have negative economic implication on the production process.
Many companies are using the law that relates on diminishing marginal returns globally to make economic decisions. The law is helping the companies to analyze the composition and productivity of their workforce with a view of analyzing their productivity to help in the economically proven decisions. Majority of companies normally employee people to help them to facilitate the production of various products and services that they supply to identified markets. These people are hired to result into an increase in the marginal product implying that the hiring of an additional employee leads to an increase in the level of production in an increasing manner. The company shall continue hiring additional employees since the marginal product is increasing. In the event that the marginal product of the new employee is less than that of the previous employee, then the firm shall consider terminating the contract of the new employee since the returns are starting to decline implying that the costs shall start to increase. According to Rittenberg (85), the prospect of hiring additional employees implies that the firm has to part with increasing sums of money inform of salaries, wages, and other forms of allowances according to the nature and specification of the individual contracts that employees have signed prior to their employment.
Leading companies in the modern economy like Apple Incorporation and Sony have been on the forefront of embracing the concept of diminishing returns in their operations to enhance their competitiveness in the market that has attracted many players. Apple started performing poorly after the death of Steve Jobs who was its CEO during the expansive period. The new management was faced with the challenge of maintaining the increased number of employees especially those in the contracted companies, in China where there was a public outcry over the terms of service that they were being subjected to by these companies. The data collected by several experts revealed the idea of diminishing returns that were being caused by increased employees that were being hired in China (Boyes and Michael 113). The firm had to come up with strategies that were meant to time the number of employees to the manageable levels to ensure that the level of marginal product remains positive. Since the application of this ...