The law of diminishing returns

The law of diminishing returns, also known as the principle of diminishing marginal returns, is an economic concept that explains how the addition of a variable input (such as labor or capital) to a fixed input (such as land or machinery) will eventually result in a decrease in the additional output or productivity gained from each additional unit of the variable input. This principle is often associated with short-term production periods and is less applicable in the long term. 

Fixed Inputs

In the short term, some inputs are considered fixed and cannot be easily changed. For example, a factory may have a fixed amount of land or machinery, and these cannot be altered quickly. The law of diminishing returns comes into play when you keep increasing a variable input (like labor) while keeping the fixed inputs constant.

Limited Capacity

Fixed inputs have limited capacity to accommodate variable inputs. Initially, as you add more variable inputs to the fixed inputs, you may see increased productivity because you are utilizing the fixed inputs more efficiently. However, there comes a point when the fixed inputs become a bottleneck, and further increases in the variable input lead to overcrowding, reduced efficiency, and diminishing returns.

Short-Term Adjustment

In the short term, it's often difficult or costly to change the quantity of fixed inputs. Therefore, firms focus on optimizing the use of existing resources to maximize production. When they add more of the variable input, they can achieve gains in productivity, but these gains tend to be temporary because the fixed inputs cannot be expanded quickly.

Long-Term Planning

In the long term, firms have the flexibility to adjust not only the variable inputs but also the fixed inputs. They can invest in expanding their facilities, acquiring more land or machinery, and making other structural changes to the production process. When these long-term adjustments are made, the law of diminishing returns may no longer hold because the fixed inputs are no longer fixed – they have been expanded or upgraded to accommodate more variable inputs, allowing for continued increases in productivity.

To summarize, the law of diminishing returns is a short-term phenomenon because it is based on the assumption that some inputs are fixed and cannot be easily changed in the immediate term. In the long term, businesses have the ability to adapt, expand, and optimize their production processes, which can mitigate the effects of diminishing returns by adjusting both fixed and variable inputs to maintain or even increase productivity.

Reference

Hayes, A. (n.d.). Law of diminishing marginal returns: Definition, example, use in economics. Investopedia. https://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp 

Theory of production and cost - toppr. (n.d.-c). https://www.toppr.com/guides/business-economics/theory-of-production-and-cost/