An analysis of the application of the law of diminishing returns

However, as the quantity of the inputs keeps on increasing, the marginal product rises to a maximum, then starts to decline and eventually becomes negative.

Furthermore, the producer would have an opportunity to increase production by employing more variable inputs and hence firing production on all engines.

This rule holds in any process of production unless the technique of production also changes.

Law of diminishing marginal product

MRP refers to the value of product obtained by multiplying the price of product and marginal product of labor. Evidently, production increases at an increasing rate. However, classical economists such as Malthus and Ricardo attributed the successive diminishment of output to the decreasing quality of the inputs. This is because after a certain point, the factory becomes overcrowded and workers begin to form lines to use the machines. In Table-3, last column shows the three stages of production, which are explained as follows: i. This is because the inputs in agriculture production are natural, while in industrial production, inputs are generally manmade. Further, this stage is very important because the firm will seek to produce in its range.

The point at which the law begins to operate is difficult to ascertain, as it varies with improved production technique and other factors. The introduction of additional units of the variable factor leads to the effective utilisation of the fixed factors. To do this, organizations can define the single resource they plan to increase: the number of agents in a call centerfor example.

Further, production can be increased by decreasing the number of variable inputs. The output per worker would therefore fall. Again, this is the reason why the marginal and average product decline at this stage.

3 stages of law of diminishing returns

This is because the inputs in agriculture production are natural, while in industrial production, inputs are generally manmade. In such a case, the organization would hire 7 workers because if it hires the 8th worker, then MRP would be Rs.

In case, the organization is in stage III; it implies that the organization needs to reduce number of workers. For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level.

The law does not apply to a production scenario where we require specifically fixed proportions of inputs.

application of law of diminishing returns

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Law of Diminishing Returns (Explained With Diagram)