Law of Diminishing Returns
The Law of Diminishing Returns, also called the Law of Variable Proportions, explains how changing one input while keeping others fixed affects output. According to Heady’s definition, when equal increments of a variable input are added to fixed resources, the resulting increase in output initially rises but eventually starts to decline after a certain point.
Key Points:
- Factor-Product Relationship: It helps decide how much input to use for optimal output.
- Stages of Production:
- Stage 1: Increasing returns (output rises rapidly).
- Stage 2: Diminishing returns (output increases but at a slower rate).
- Stage 3: Negative returns (output declines).
Limitations:
The law may not apply under certain conditions, such as:
- Improved Methods of Cultivation: Advanced technology can increase output despite more input.
- New Soils: Fresh, fertile lands may continue to yield high returns.
- Insufficient Capital: Lack of complementary resources can prevent efficient production.
Concepts of production
Total Production (TP): Total Product is the total quantity of output produced by a given quantity of inputs. Mathematically, TP is the sum of all the units of output produced. If Q represents the total quantity of output and L is the quantity of a specific input (like labor), then TP is denoted as Q = f (L).
Average Product (AP): Average Product is the output produced per unit of input. It is calculated by dividing Total Product (TP) by the quantity of the input (e.g., labor). Mathematically, AP is represented as AP= Q/L where Q is the total quantity of output, and L is the quantity of the input.
Marginal Product (MP): Marginal Product is the additional output produced by one additional unit of input while keeping other inputs constant. Mathematically, MP is expressed as the derivative of Total Product with respect to the quantity of the input. In calculus terms, if Q is the total product and L is the quantity of input, then MP is the derivative dQ / dL
Three Stages of Production:
The production function is divided into three distinct stages based on how TP, AP, and MP behave as input use increases.
Stage I: Increasing Returns (Sub-Optimal Zone)
- This stage starts from zero input and continues until the Average Product (AP) reaches its maximum, where MPP = APP.
- Key Characteristics:
- TP: Increases at an increasing rate initially, then at a decreasing rate after the point of inflection.
- MP: Increases up to the point of inflection, then starts to decline.
- AP: Increases throughout this stage as MPP > APP.
- Reason: Inputs are underutilized, and production increases due to better resource coordination.
- End Point: This stage ends when MPP = APP, where AP is at its maximum.
- Conclusion: It is irrational to produce in this zone because resources are not fully utilized.
Stage II: Diminishing Returns (Rational Zone)
- This stage begins where AP is maximum (MPP = APP) and ends when MP becomes zero (TP is maximum).
- Key Characteristics:
- TP: Increases but at a decreasing rate.
- MP: Declines but remains positive.
- AP: Declines throughout this stage.
- Reason: Resources are better utilized, but as more input is added, the fixed factors become a limitation.
- End Point: When MP reaches zero, and TP is at its maximum.
- Conclusion: This is the rational zone for production, where farmers should operate to maximize profit.
Stage III: Negative Returns (Supra-Optimal Zone)
- This stage starts when MP becomes negative and TP begins to decline.
- Key Characteristics:
- TP: Decreases as more input is added.
- MP: Becomes negative.
- AP: Continues to decline but remains positive.
- Reason: Excessive inputs lead to overcrowding, inefficiency, and resource wastage.
- Conclusion: This zone is irrational for production, and farmers should avoid it, even if inputs are free.
