The Law of Diminishing Return Definition, Graph

Sun, 10/06/2013 - 10:21 -- Umar Farooq

Define The Law of Diminishing Return

The law is also known as the law of increasing costs. It is one of the important laws of microeconomics. The law of diminishing return indicates that if the number of variable inputs is increased with some fixed inputs, the total output will first increase but then start to decline. It is the third stage of the law of variable proportions. The law is applicable both in agricultural and industrial sectors. This law is nothing but a generalization drawn from the practical experience of farmers. The producing capacity of the soil is limited. Up to a point we can profitably increase the application of labour and capital in the cultivation of a plot of land. Giving further doses of labour and capital lead to depletion of valuable properties of soil. The result is that there are disproportionate returns

Assumptions

  1. There is short run in the market during which fixed factors of production cannot be changed.
  2. Labour is the only variable factor while other factors are assumed constant.
  3. All units of variable factors are homogeneous and equally efficient.
  4. There is no change in the state of technology and techniques of production.
  5. The reward of the factors of production should remain constant.

Explanation

The law can be explained with the help of the following schedule and diagram.

The Schedule shows that if one unit of labour is applied on 12 acres of land (which is fixed), it will produce 20 mounds of wheat. When two units of labour are applied on the same quantity of land, the total production will increase to 45 mounds. Thus marginal production (MP) of the second variable factor is 25 mounds. It is clear that the given quantity of land cannot be fully utilized by applying only one labour. Thus the units of labour are increased again and again. The optimum level is achieved when the 6th unit is applied at which MP of labour is Zero and TP is Maximum. After the optimum level the additional unit of labour results in negative marginal production and decline in TP.

In the Law of diminishing return graph the units of labour are measured along X-axis while the Total and Marginal production is measured along Y-axis. The total production (TP) curve is represented by NRS while NUL represents the, Marginal Production (MP) Curve.

The first unit of labour gives us 20 mounds of MP of wheat and the 2nd gives us 25 MP, which is the maximum. The MP of the first two units shows the application of the law of increasing return i.e. from M to K, but this law does not remain in application forever, because the capacity of the fixed factor is not unlimited that is why with the use of the 3rd unit, the MP has decreased to 15 and at the 6th unit it has come to zero, which is the optimum level. After using the 7th unit the MP becomes negative at the same time the total production, which in the beginning was increasing has also started to decrease i.e. from R to S. At point R the TP is maximum and at point 0 MP is Zero. This is the optimum level beyond which MP becomes negative which is shown at point L.

Application of Law of Diminishing Return

Economists of early times were of the view that Law was applicable only in the agriculture sector like Forestry, Mining, Fishing, Cattle Breading etc. But according to modern economists this law is applicable in almost every sector of the economy particularly in agriculture and industrial sector and the reason is that one factor is kept constant and other factors keep on changing and increasing. For example in agriculture sector if the quantity of land is kept constant and other factors like labour and capital are changed, total production will increase at a diminishing rate after using the additional units of variable factors. Similarly it can happen in industrial sector, e.g. if size of the building or No. of machines is kept constant and the number of labour is increased that the MP of additional units of labour for a given amount of a fixed factor will diminish.

The law of Diminishing Returns says that for given technological conditions, there will be a point beyond which the addition of more variable factor(s) to a fixed factor will bring falling return per unit of variable factor employed.