Law of diminishing marginal product



Law of diminishing marginal product

Sometimes referred to as variable factor proportions, law of diminishing returns states that as equal quantities of one variable factor are increased, while other factor inputs remain constant, a point is reached beyond which the addition of one more unit of the variable factor will result in a diminishing rate of return and the marginal physical product will fall.

Explanation
The reason behind the law of diminishing returns or the law of variable proportion is the following. As we hold one factor input fixed and keep increasing the other, the factor proportions change. Initially, as we increase the amount of the variable input, the factor proportions become more and more suitable for the production and marginal product increases. But after a certain level of employment, the production process becomes too crowded with the variable
input and the factor proportions become less and less suitable for the production.

Example - If at one shop 1 person is working and if we employ 1 more person , then, total income will increase at an increasing rate as they can have better division of labor now. Income will increase at an increasing rate till there are 5 workers and they are fully utilized. And if we will employ 1 more person then total income might increase, but the average income will fall, ie income per person will fall due to 1 extra unit of labour. or we can say addition made by the 6th worker is less than the earlier unit (ie Marginal product of 6th unit of labour will fall.)

No comments: