Answer to Question #47616 in Microeconomics for anand

Question

relationship between the law of diminishing return and three stages of production.

Answer 1

Economists recognize three distinct stages of production, which are defined by a concept known as the law of diminishing marginal returns. This law holds that as you add more workers to the production process, output will increase -- but the size of that increase will get smaller with each worker you add. At some point, if you keep adding workers, your output may even start shrinking. The idea of the three stages of production helps companies set production schedules and make staffing decisions.
Stage one is the period of most growth in a company's production. In this period, each additional variable input will produce more products. This signifies an increasing marginal return; the investment on the variable input outweighs the cost of producing an additional product at an increasing rate.
Stage two is the period where marginal returns start to decrease. Each additional variable input will still produce additional units but at a decreasing rate. This is because of the law of diminishing returns: Output steadily decreases on each additional unit of variable input, holding all other inputs fixed.
In stage three, marginal returns start to become negative. Adding more variable inputs becomes counterproductive; an additional source of labor will lessen overall production. For example, hiring an additional employee to produce cans will actually result in fewer cans produced overall. This may be due to factors such as labor capacity and efficiency limitations. In this stage, the total product curve starts to trend down, the average product curve continues its descent and the marginal curve becomes negative.