Law Of Diminishing Marginal Returns (Productivity)

Question 1

What Is The Law Of Diminishing Marginal Returns?

Answer 1

It is a law that states that as additional units of a variable factor input are combined with a fixed factor input, eventually the marginal product and the average product of the variable factor input will diminish. Total output will then increase at a decreasing rate.

Initially, increasing returns to the variable factor input will lead to a rise in the marginal product. Eventually shortage of the fixed factor and inefficiency due to congestion will cause the marginal product to fall.

Question 2

What Are Assumptions Of The Law Of Diminishing Marginal Returns?

Answer 2

One factor input is fixed e.g. land, capital or technology.

All units of the variable factor input are identical - equally efficient or productive.

Level of technology does not change.

Question 3

What Are Limitations Of The Law Of Diminishing Marginal Returns?

Answer 3

DMR is a short-run concept. It has no relevance in the long-run when all factor inputs become variable.

Fixed costs make up a very high proportion of total costs in the short-run. A continuous fall in AFC could offset the rise in MC and AVC. Diminishing returns will not set in.

A rise productivity of labour, capital or land due to improved technology could offset diminishing marginal returns.

A firm could continuously enjoy increasing returns or constant returns to the variable factor up to a relatively high level of output. This would lead to falling or constant MC.