Law Of Diminishing Marginal Productivity

Published Oct 25, 2023

Definition of Law of Diminishing Marginal Productivity

The Law of Diminishing Marginal Productivity states that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease. In other words, after a certain point, the additional output produced by each additional unit of the variable input will be smaller than the output produced by the previous unit.

Example

To understand the Law of Diminishing Marginal Productivity, let’s consider a factory that produces cars. The fixed inputs in this case would be the factory building, machinery, and equipment, which cannot be easily changed in the short run. The variable input would be the number of workers.

Initially, when the factory has few workers, adding more workers will greatly increase the production output. This is because the existing workers can effectively utilize the available resources and cooperate efficiently. However, as the number of workers continues to increase, there will come a point where the factory becomes crowded, and cooperation among workers becomes more difficult. At this stage, adding more workers may not lead to the same level of increase in output. In fact, it might even result in a decrease in productivity due to coordination problems, limited workspace, or inadequate supervision.

For example, if a factory originally has 10 workers and produces 100 cars per day, adding one more worker might increase the daily production to 110 cars. However, when the factory already has 50 workers, adding another worker might only increase the production to 150 cars, indicating diminishing marginal productivity.

Why the Law of Diminishing Marginal Productivity Matters

The Law of Diminishing Marginal Productivity is an important concept in economics and business decision-making. Understanding this law helps businesses optimize their production processes and make efficient use of resources. By identifying the point of diminishing returns, businesses can determine the optimal level of input to maximize output and minimize costs. This knowledge is particularly relevant in industries that rely on labor-intensive production processes or where the addition of more workers or resources has diminishing returns.