Diminishing Marginal Product

Published Dec 26, 2022

Definition of Diminishing Marginal Product

Diminishing marginal product is defined as the decrease in the marginal product of a factor of production as more of that factor is employed. That means it describes the situation where the output of a certain factor of production (e.g., labor, capital, land) decreases as more of it is used.

Example

To illustrate this, let’s look at a small bakery. The bakery produces cakes and employs two bakers. At first, the bakery produces 10 cakes per day with one baker. When the second baker is hired, the output increases to 15 cakes per day. However, when the third baker is hired, the output only increases to 17 cakes per day, because the bakers start getting in the way of each other in the small bakery. This is an example of diminishing marginal product.

Why Diminishing Marginal Product Matters

Diminishing marginal product is an important concept in economics. It helps to explain why firms may not always hire more workers even when there is an increase in demand. That is because the marginal product of labor decreases as more workers are hired. Thus, the cost of hiring additional workers may outweigh the benefit of increased output.

This concept is also important for understanding the concept of diminishing returns. That is because diminishing marginal product is one of the main causes of diminishing returns. In other words, it explains why the total output of a certain factor of production may decrease as more of it is used.