explain with diagram the 3 stages of production. why does law of diminishing returns operate?
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You might have heard of the proverb: ‘Too many cooks spoil the broth’. The law of diminishing returns discusses this in the context of production. What happens when we keep on adding inputs and exceed the quantity required for optimum production? Let’s find out.
The Law of Variable Proportions
The law of variable proportions is a new name for the law of diminishing returns, a concept of classical economics. But before getting on with the law, there is a need to understand total product (TP), marginal product (MP) and average product (AP).
Total Product: Total product is the total output obtained from the combined efforts of all the factors of production. Further, if we wish to find the effect of one factor of production, say labour, on the total product, we need to keep all the other factors constant. In this case, the total product would vary with the factor kept variable.
Marginal Product: The change in the total product when one more unit is added to the variable factor is known as the marginal product.
Average Product: Average product is the total product per unit of the variable factor. In other words, it is the ratio of total product to the quantity of variable factor.
The Relationship between Average Product and Marginal Product
When there is a rise in the average product due to an increase in the quantity of the variable input, the marginal product is more than the average product.
The maximum average product is equal to the marginal product. Simply put, the maximum point of the average product curve is also a point on the marginal product curve, a point where both of these curves intersect.
When the average product falls, the marginal product is less than the average product.
The Law of Diminishing Returns
The law of diminishing returns operates in the short run when we can’t change all the factors of production. Further, it studies the change in change in output by varying the quantity of one input. Technically, the law states that as we increase the quantity of one input which is combined with other fixed inputs, the marginal physical productivity of the variable input must eventually decline.
In simpler words, the total productivity, for a given state of technology, is bound to increase with an increase in the quantity of a variable input. However, as the quantity of the inputs keeps on increasing, the marginal product rises to a maximum, then starts to decline and eventually becomes negative. This is because the crowding of inputs eventually leads to a negative impact on the output. Lastly, The law of diminishing returns also comes with some assumptions:
We assume the state of technology to be constant. A variable state of technology would impact the marginal and average product. In that case, we would not be able to accurately study the relationship between output and the fixed input.
Only one input should be variable. keeping other inputs constant. This law does not apply to cases when all the inputs vary proportionately. In that case, the returns to scale comes to the rescue.
The law does not apply to a production scenario where we require specifically fixed proportions of inputs. In such a case, increase in any input would not have any impact on production, since the marginal product will be equal to zero.
We consider only physical inputs and outputs and not economic profitability in monetary terms.
We can divide the behavior of output when varying one input, keeping other inputs fixed in the short run, into three stages.
Stage I: Increasing Returns
We characterize this stage with the total output increasing at an increasing rate with each additional unit of variable input. This continues to the point A on the TP curve. Further, the MP curve rises to the point X corresponding to the point B on the TP curve, also known as the point of inflexion. After point B, the TP curve continues to rise but now at a decreasing rate. The MP also starts to fall but is positive. The end of this stage sees the maximu
The Law of Variable Proportions
The law of variable proportions is a new name for the law of diminishing returns, a concept of classical economics. But before getting on with the law, there is a need to understand total product (TP), marginal product (MP) and average product (AP).
Total Product: Total product is the total output obtained from the combined efforts of all the factors of production. Further, if we wish to find the effect of one factor of production, say labour, on the total product, we need to keep all the other factors constant. In this case, the total product would vary with the factor kept variable.
Marginal Product: The change in the total product when one more unit is added to the variable factor is known as the marginal product.
Average Product: Average product is the total product per unit of the variable factor. In other words, it is the ratio of total product to the quantity of variable factor.
The Relationship between Average Product and Marginal Product
When there is a rise in the average product due to an increase in the quantity of the variable input, the marginal product is more than the average product.
The maximum average product is equal to the marginal product. Simply put, the maximum point of the average product curve is also a point on the marginal product curve, a point where both of these curves intersect.
When the average product falls, the marginal product is less than the average product.
The Law of Diminishing Returns
The law of diminishing returns operates in the short run when we can’t change all the factors of production. Further, it studies the change in change in output by varying the quantity of one input. Technically, the law states that as we increase the quantity of one input which is combined with other fixed inputs, the marginal physical productivity of the variable input must eventually decline.
In simpler words, the total productivity, for a given state of technology, is bound to increase with an increase in the quantity of a variable input. However, as the quantity of the inputs keeps on increasing, the marginal product rises to a maximum, then starts to decline and eventually becomes negative. This is because the crowding of inputs eventually leads to a negative impact on the output. Lastly, The law of diminishing returns also comes with some assumptions:
We assume the state of technology to be constant. A variable state of technology would impact the marginal and average product. In that case, we would not be able to accurately study the relationship between output and the fixed input.
Only one input should be variable. keeping other inputs constant. This law does not apply to cases when all the inputs vary proportionately. In that case, the returns to scale comes to the rescue.
The law does not apply to a production scenario where we require specifically fixed proportions of inputs. In such a case, increase in any input would not have any impact on production, since the marginal product will be equal to zero.
We consider only physical inputs and outputs and not economic profitability in monetary terms.
We can divide the behavior of output when varying one input, keeping other inputs fixed in the short run, into three stages.
Stage I: Increasing Returns
We characterize this stage with the total output increasing at an increasing rate with each additional unit of variable input. This continues to the point A on the TP curve. Further, the MP curve rises to the point X corresponding to the point B on the TP curve, also known as the point of inflexion. After point B, the TP curve continues to rise but now at a decreasing rate. The MP also starts to fall but is positive. The end of this stage sees the maximu
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