Tag Archives: QE2

The Governments Dilemma – Is there a Way Out or is it a Catch 22

WHERE  HAS  COMMON  SENSE  GONE, No. 18, Thomas Paine – March  2011

Economists have a well recognized axiom used to describe one aspect of production activity. It is called the “Law of Diminishing Returns”.

The law states “that we will get less and less extra output when we add additional doses of an input while holding other inputs fixed. In other words, the marginal product of each unit of input will decline as the amount of that input increases holding other inputs constant.”

What does this axiom really mean? A simplified example can be used to illustrate what is meant.

Suppose a farmer has typically harvested 100 units of crop for every 100 pounds of seed he has planted in his field. This ratio has held steady for years with only minor variances due to generally benign weather conditions year to year. The 100 units of crop can be considered the economic production. The inputs are the amount of seed sown, the available amount of land, the amount of fertilizer applied, the number of days of sunshine and normal temperature and the amount of rain that falls. Continue reading →