Returning to our earlier example, let us assume that we are given certain amounts of factors G and H. The amount of C that is produced, which we shall call c, is thus determined by the amount of F that is allocated, which we shall call f. The ratio c/f is known as the average return of C to F. In a similar manner, we could determine the average return of C to G, or the average return of C to H.

This average return of C to F will vary according to the quantity f that is supplied of factor F. Suppose, for example, that F is the labor factor at a certain large factory. It may be impossible to run the factory effectively with fewer than 10 workers. Consequently, in this range (where f < 10) the average return per worker is quite low. A staff of 10-50 workers can run the factory more efficiently, with a higher average return. Although total production still increases as the staff grows beyond 50 workers, the facility grows increasingly cramped and workers are obliged to wait in line for scarce tools, so that the average return drops after this point. The law of returns states that there exists an optimum quantity of F, beyond which any additional units of F will yield a diminishing average return. Before presenting a formal proof of this law, let us see how it applies to Crusoe's coconut gathering.      Next page

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