Is the basic difference between the short run and the long run that the law of diminishing returns applies in the long run, but not in the short run?
The basic difference between the short run and long run is that in the short run, at least one of the factors of production is fixed i.e. it can not be varied in the given time period. On the other hand in the long run, all the factors of production are variable.
So, due to this, law of diminishing returns occur only in the short run when one factor of production is fixed. Since, atleast one of the factor is fixed, increasing the variable factor after a certain point causes a realtively smaller increase in output. This is because, if capital is fixed, extra workers get in each other’s way as they try to increase production. This happens only in short run because in the long run all the factors are variable.
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