The law of diminishing returns is very old and fundamental principle of economics. It plays an essential role in production theory. According to the law, when variable factors of production are successively increased while keeping one or two other factors constant, then after a point the marginal output will begin to decline. For example, adding more and more workers to a job will increase total output but diminish marginal output after a certain point.
Law of Diminishing Returns (Explanation)
The law of diminishing returns
can be explained with the help of a schedule and a diagram.
The above table shows when the
employer applies 1 unit of variable factor (labor and capital) while keeping
the units of machine constant, he gets 600 production of bottles. When he
increased the unit of variable factor from 1 to 2, his production increased
from 600 to 700 bottles. We can see the marginal output is increasing till
third unit of variable factor. After third unit of variable factor is employed,
the marginal output goes on declining. This declining of marginal output after
third unit is showing the law of diminishing returns.
The law of diminishing returns
can further be illustrated by using an imaginary diagram.
Units of variable factors of
production (capital and labor) on X-axis and units of marginal output on Y-axis
have been measured in the above diagram (2.3). We can see the marginal output
is increasing till second unit of variable factor. After the second unit of variable
factor, the marginal output begins to decline which is representing the law of
diminishing returns.
Assumptions of The Law
The law of diminishing returns
is based on the following assumptions:
1. Technique of production
must remain constant.
2. The law is applicable in
short run. It will not work in long run, because in long run all factors of
production become variable.
3. All the units of variable
factors should be similar to each other and are equally efficient.
4. At least one factor of
production must be kept fixed.
Law of Increasing Cost
As marginal output is
declining with the successive use of variable factors, the marginal cost is
rising. Therefore, the law of diminishing returns is also known as the law of
increasing cost. The given below table
is illustrating the law of increasing cost.
The above table shows as the
units of labor is applied successively while keeping the units of machine
constant at 7, the marginal output of bottle is declining and the marginal cost
per bottle is rising which is representing the law of increasing cost.
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