What is Law of Diminishing Marginal Product | Law of Variable Proportions

Short Run and Long Run | Total Product, Average Product and Marginal Product

In previous sessions, we discussed in detail about production functions. We also saw the context of Short Run and Long Run for a firm. We then moved on to discuss the Total Product, Average Product and Marginal Product. While studying all three of them i.e., Total Product, Average Product and Marginal Product we kept the variable input in focus. We make a distinction between Short Run and Long Run for a firm on the basis of whether the firm is able to alter its all inputs or not. For simplicity we assumed that a firm uses only two inputs namely Labor and Capital. For a firm, Short Run is a time period in which it cannot alter all the inputs that is in our case, at least one of the above inputs labor or capital will remain fix and the firm can alter the other input. On the other hand, the Long Run for a firm is a period, where it can alter all the inputs i.e., both labor and capital are variable.

Thus keeping in view the above context, we define the Total Product, Average Product and Marginal Product in relation to the only variable factor. The relationship between the Total Output and the amount of Variable Input keeping all other inputs fixed or constant is known as the Total Product of the Variable Input. The total output per unit of variable input is known as the Average Product of the Variable Input. The change in total output per unit of change in the Variable input keeping all other inputs constant is known as the Marginal Product.

In this session, we will study how the Total Product, Average Product and Marginal Product fluctuate simultaneously and how each of their movement decides each other’s behavior, giving rise to the concept of Law of Diminishing Marginal Product or Law of Variable Proportions or Law of Diminishing Marginal Returns.

Law of Diminishing Marginal Product or Law of Variable Proportions or Law of Diminishing Marginal Returns.

Before moving forward, it is very important to keep in mind that the Law of Diminishing Marginal Product or Law of Variable Proportions or Law of Diminishing Marginal Returns are all names given to the same phenomenon.

We will understand the same with an illustration.

Here is a table which provides the different figures for Total Product, Average Product and Marginal Product at different level of variable input i.e., here labor.

On plotting the figures of Total Product, Average Product and Marginal Product on a graph, with the X-axis representing the input i.e., here labor and Y-axis representing the output, we get the following graph.

In the above graphical representation, the curves represent the Total Product, Average Product and Marginal Product respectively.

First of all, we see that the Total Product increases as the input here labor increases. But the rate at which the Total Product increases is not constant. Initially when the labor increases from 1 to 2, the Total Product increased from 20 to 48 i.e., an increase of 28 units. And as the labor increased from 2 to 3, the Total Product increased from 48 to 80, an increase of 32 units. But then moving forward as the labor increased from 3 to 4, the Total Product increased from 80 to 100, an increase of just 20 units. So the rate of increase in Total Product was increasing initially and after a stage starts decreasing.

The rate at which the Total Product is changing is accurately captured by the Marginal Product. We can see, the Marginal Product increases initially up to 3 units of labor thus imitating the rate of increase in Total Product and then the Marginal Product starts falling as labor increases above 3 units, again imitating the fall in the rate of increase in the Total Product.

The phenomenon of Marginal Product increasing initially and then gradually falling is called the Law of Variable Proportions or the Law of Diminishing Marginal Product or the Law of Diminishing Marginal Returns.

The Law of Variable Proportions states that the Marginal Product of a factor or input initially increases as the level of factor or input in use or employment increases. But after reaching a certain level of employment or use of a factor, the Marginal Product of that factor starts falling.

But the question is why does it so happen?

The answer to this is the Factor Proportions. Factor Proportions is the ratio in which any two inputs are combined to produce an output.

As discussed above, out of the two factors, one is fixed and the other variable. And as one of the factor or input is fixed and we keep on increasing the other, the factor proportion changes. The increase in the output for any firm depends upon how favorable or suitable the factor proportions are for the production. With the increase in the variable factor or input initially, the factor proportions become more and more favorable and hence the Marginal Product increases initially. But after a certain level of increase in employment or use of the variable factor, the same results into making the production process over crowded with the variable factor or input.

The above phenomenon can be noticed in the following table.

Let us assume, that the above figures are representing different output levels for a farmer having 3 hectares of land. As the farmer employs first labor, the labor alone cultivates the whole land alone which is too large for one labor. And as the farmer increases the number of labors, the number of labor per unit of land increases and thus each worker contributes more and more to the total output i.e., the Marginal Product keeps increasing at this stage up to addition of 3rd labor. As the 4th labor is added the cultivation process i.e., here the land begins to get crowded as each worker will now have insufficient land to work efficiently. And hence even the contribution of each additional worker towards the total output keeps decreasing. And hence the Marginal Product starts falling. Hence confirming the phenomenon of Law of Diminishing Marginal Product.

Conclusion

In this session, we discussed in detail about the inter-relationship between Total Product, Average Product and Marginal Product. And then we finally moved on to discuss the Law of Diminishing Marginal Product or Law of Variable Proportions or Law of Diminishing Marginal Returns.