Law of Diminishing Marginal Productivity

The law of diminishing marginal productivity states that as additional units of a variable input are added to a fixed input, the marginal (additional) output will eventually decrease. In other words, the marginal product of a factor of production will eventually decline as more of that factor is added to the production process.

The law of diminishing marginal productivity is a fundamental principle of economics that has important implications for business decision-making. For example, the law of diminishing marginal productivity suggests that it is not always profitable to increase production by adding more workers. In some cases, the additional output generated by the new workers will be less than the cost of hiring them.

The law of diminishing marginal productivity can be illustrated with the following example. Suppose a farmer has 10 acres of land and 1 tractor. If the farmer adds 1 worker, the total output of the farm will increase. However, if the farmer adds a second worker, the total output of the farm will increase by less than it did when the first worker was added. This is because the first worker was able to use the tractor more efficiently than the second worker.

The law of diminishing marginal productivity can also be applied to other factors of production, such as capital and labor. For example, if a company adds more machines to its production process, the total output of the company will increase. However, if the company adds more machines beyond a certain point, the total output of the company will increase by less than it did when the first machine was added. This is because the additional machines will not be able to use the existing workers as efficiently as the first machine.

The law of diminishing marginal productivity is an important concept for understanding the relationship between inputs and outputs in the production process. The law of diminishing marginal productivity suggests that it is not always profitable to increase production by adding more inputs. In some cases, the additional output generated by the new inputs will be less than the cost of the inputs.