Explain the causes diminishing returns to factor.
Answers
Answer:
1. Fixed Factors of Production:
The law of diminishing returns applies because certain factors of production are kept fixed. All factors of production, land, labour, capital or enterprise cannot be increased every time. As we know that production is the result of the effective combination of factors of production, every factor will have to be increased for obtaining production at increased rates.
If certain factor becomes fixed, the adjustment of factor of production will be disturbed and the production will not increase at increasing rates and thus law of diminishing returns will apply.
2. Scarce Factors:8
In case of certain factors especially land which is itself limited cannot be increased the law of diminishing return will apply. It may also happen in case of other factors of production. For example, sometimes, labour, specially technical or capital or even enterprise cannot be increased in individual cases. As a result, the adjustment of factors of production will be disturbed and the output cannot be achieved at increasing rates.
3. Lack of Perfect Substitutes:
There is another reason due to which the law of diminishing returns does not apply i.e., lack of perfect substitutes of factors of production. It means that one factor of production cannot be substituted for another factor. Substitute for every factor of production is not always available. In the absence of such substitute, the law of diminishing returns will apply.
4. Optimum Production:
If the perfect adjustment of the factors of production has been made, certainly optimum production will be returned. After this optimum level of production, more and more variable factors will result in less efficient combination of fixed as well as variable factors of production. In other words, this, will reduce the marginal product and hence the law of diminishing returns will operate.
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