The Law of Diminishing Marginal Productivity | Microeconomics

There is a widespread belief among economists, supported by some empirical evidence that –  As more of an input x_i is employed, all other input quantities being held constant, eventually a point will be reached where the additions to the total product made by successive units of input x_i, will decline.

This law assumes that the technology is constant, and is of a variable proportions type. It is an empirical generalization, and an inductive law. This law is sometimes also called the law of variable proportions. This is because the proportion between the variable and the fixed inputs is varied in order to study its effect on output.

The significance of this law has already been noted. It ensures the existence of an optimum level of input use when only one input can be varied. It is also required for an optimum when more than one input can be varied, and the price of the product is given to the firm. Thus diminishing marginal productivity assures us of the equilibrium of firms in different situations.

The law of diminishing marginal productivity derives from one of the oldest ideas in economic theory – the law of diminishing returns. This was first proposed by Turgot, and applied by Ricardo in his theory of rent.

Marshall restated this law as follows:

An increase in the capital and labour applied in the cultivation of land, causes in general, a less than proportionate increase in the amount of produce raised….

The law of diminishing returns may be generalized to cover the case of fixed inputs other than land as well. Thus it seems intuitively plausible that, as any fixed input gets overworked by increasing quantities of variable inputs, the increases in output are likely to decline.

This old idea of diminishing returns can be rigorously stated in the form of diminishing marginal productivity, when there is only one variable input. Thus the marginal productivity of a variable input diminishes after a point because the fixed inputs get overworked.

Short Run, Long Run and Fixed Inputs:

The short run may be described as a period of time in which some inputs can be varied, whereas others cannot. The inputs that cannot be varied are usually considered to be equipment, buildings etc., whose acquisition or hire (or even disposal) takes time to realize. Such inputs are called fixed inputs. Since there are some fixed inputs in the short run, we may expect diminishing returns to set in eventually.