The Law of Diminishing Returns

10 Key excerpts on "The Law of Diminishing Returns"

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  eBook - PDF

  Fundamentals of Environmental Economics

  • Kumar, A(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Chapter 2 Environmental Economics Basic Concepts The Law of Diminishing Returns The “law of diminishing returns” is one of the best-known principles outside the field of economics. It was first developed in 1767 by the French economist Turgot in relation to agricultural production, but it is most often associated with Thomas Malthus and David Ricardo. They believed that human population would eventually outpace the production of food since land was an integral factor in limited supply. In order to increase production to feed the population, farmers would have to use less fertile land and/or increase production intensity on land currently under production. In both cases, there would be diminishing returns. The Law of Diminishing Returns – which is related to the concept of marginal return or marginal benefit – states that if one factor of production is increased while the others remain constant, the marginal benefits will decline and, after a certain point, overall production will also decline. While initially there may be an increase in production as more of the variable factor is used, eventually it will suffer diminishing returns as more and more of the variable factor is applied to the same level of fixed factors, increasing the costs in order to get the same output. Diminishing returns reflect the point in which the marginal benefit begins to decline for a given production process. For example, the Table 1 sets the conditions on a farm producing corn. It is with three workers that the farm production is most efficient because the marginal benefit is at its highest. Beyond this point, the farm begins to experience diminishing returns and, at the level of 6 workers, the farm actually begins to see decreasing returns as production levels decline, even This ebook is exclusively for this university only. Cannot be resold/distributed.

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  Economics of Production and Marketing of Citrus

  • Bhat, Anil(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Chapter 2 Economic Theories of Production Production refers to the economic process of converting of inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Also level of output of a particular commodity depends upon the quantity of input used for its production. In other words production means transforming inputs land, labour, capital) into an output. 2.1. Theoretical Orientation 2.1.1. Laws of Production Theory of production is based on the following laws of production such as: “Law of Diminishing Returns/Law of Increasing Cost, Law of Increasing Returns/Law of Diminishing Cost and Law of Constant Returns/Law of Constant Cost“ 2.1.1.1. Law of Diminishing Returns/Law of Increasing Cost The Law of Diminishing Returns (also called the Law of Increasing Costs) is an important law of micro economics. The Law of Diminishing Returns states that: “If increasing amounts of a variable factor are applied to fixed quantity of other factors per unit of time, the increments in total output will first increase but beyond some point, it begins to decline ”. This ebook is exclusively for this university only. Cannot be resold/distributed. Richard A. Bilas describes The Law of Diminishing Returns in the following words: “If the input of one resource to other resources are held constant, total product (output) will increase but beyond some point, the resulting output increases will become smaller and smaller ”. · (a) Operation of Law of Diminishing Returns The classical economists were of the opinion that The Law of Diminishing Returns applies only to agriculture and to some extractive industries, such as mining, fisheries urban land, etc. The law was first stated by a Scottish farmer as such.

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  Encyclopedia of Environmental Science Vol 7

  Environmental Economics

  • Shalinee Naidoo(Author)
  • 2019(Publication Date)
  • Delve Publishing

    (Publisher)

  It was first developed in 1767 by the French economist Turgot in relation to agricultural production, but in actual fact, is most often associated with Thomas Malthus and David Ricardo. The first explanations of diminishing returns came from Turgot in the mid-1700s. Ricardo further contributed to the development of the law by referring to it as the “intensive margin of cultivation.” He showed how additional labor and capital linked to a fixed piece of land would successively generate smaller increases in output. Malthus then introduced the idea during the construction of his population theory which argues that population grows geometrically while food production increases arithmetically. This ultimately results in Understanding the Basics of Environmental Economics 19 a population that outgrows its food supply. These neoclassical economists showed that while each unit of labor is exactly the same, diminishing returns are caused due to a disruption of the entire production process as extra units of labor are added to a set amount of capital. They believed that the human population would eventually outgrow or outpace the production of food since land formed such an integral factor despite its limited supply. In this instance, to increase production in order to feed the population, farmers would have to use less fertile land or increase the production intensity on land currently under production. Figure 6.1: The Law of Diminishing Returns. 6.2.1. The Law of Diminishing Returns Explained Example 1 The law can be explained by using a manufacturing factory as an example. Imagine a factory that employs workers to manufacture its products. At some point, the factory would operate at an optimal level. However, while other factors of production remain constant, adding additional workers beyond this optimal level will result in less efficient operation. This is because the extra workers will eventually get in each other’s way as they attempt to increase production.

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  Lionel Robbins on the Principles of Economic Analysis

  The 1930s Lectures

  • Lionel Robbins, Susan Howson(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  some of them dropping out without greatly disorganizing the rest if substitutes are available in the shape, say, of a certain kind of machine or another kind of labour. That is to say over the broad field of production it is not inappropriate to assume variability of factor combination – substitution at the margin.

  On the other hand, it is important to realize that this possibility only exists within limits. The combination of factors to produce a given product is not indefinitely variable. Some combinations are less efficient than others. Variation is only possible at the expense of varying productivity.

  It is this important fact which is sometimes described by what has come to be known as The Law of Diminishing Returns.

  Now there is no more protean “law” in the whole range of Economic Theory than The Law of Diminishing Returns. To understand properly its significance in every branch of theory in which it is used requires I think a not inconsiderable acquaintance with the history of theory. When I come back to deal in greater detail with the more technical parts of the ground we are now covering I shall examine it in some detail.

  From our point of view it is sufficient to distinguish two variants of the law. The first runs as follows. If two factors of production x and y are used in combination and the quantity of one is varied the other remaining constant the return measures as an average of the variable factor first increases, reaches a maximum and then diminishes. That is the form in which you encounter the law in discussion of the population problem. It relates, as you see, to average productivity. But in this form it is not useful in our present discussion. I mention it only in order to distinguish it from the second, with which it is sometimes confused.

  The second runs as follows: If two factors of production x and y are used in combination and the quantity of the one is varied, the other remaining constant, the additions to the product made by additional y’s first increase, reach a maximum and then diminish. Here you see we are discussing marginal

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  Alternative Principles of Economics

  • Stanley Bober(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  But in modern times the notion of diminishing returns was taken up in a micro setting, serving to underpin cost curves of the firm and the normally constructed production function. And while the latter is talked about in terms of an aggregate relationship between output per capita and capital per capita, it does rest on the individual firm’s presumed ability to vary one input while holding other inputs constant. But this was more than simply setting the mechanics of production; it brought forth an understanding of the distribution of output based on marginal productivity considerations. The idea of taking The Law of Diminishing Returns as an operative relationship on the firm level led to an aggregate production function that was used to account for the distributive shares of wages and profits based on factor marginal productivity. In addition, going back to its micro application, The Law of Diminishing Returns served to account for the rising supply price of a particular commodity.

  So the question before us is what are the assumptions or modifications that positioned the law in its micro stance, being a cause of variation in the relative price of individual commodities? It is important to reiterate that diminishing returns in its original usage was understood to affect not only rent but also the cost of production in terms of a total sector, that is, agriculture as a whole. Thus even in its relation to costs, the analysis dealt with output as a whole and not with the relation between cost and quantity produced of an individual producing unit.

  Yet in its modern role, diminishing returns is involved in the theory of competitive pricing through its impact on the firm’s supply curve construction. All that was necessary was to generalize the particular case of agricultural land to a situation where, in the production of a particular commodity, a firm employs a considerable portion, if not all, of a productive input, the amount of which is fixed or can be increased at considerable cost. Consider then that we are dealing with firm alpha; an increase in the demand for alpha commodities will necessitate a more intense use of that input, resulting in the diminishing returns outcome with increasing costs and the usual upward-sloping supply curve.

  But this image of a single firm or industry using all of an input factor that is unique only to its production is rather unreal or very particular. What is more to the point is to presume that other firms, say beta and gamma, also utilized this input in some proportion to their output. Now assuming full employment and the competitive model equilibrium, an increase in the demand for alpha output will reflect a reduction in the demand of, let us presume, both the output of beta and gamma. Thus some of this fixed input will be transferred from firms in general (beta and gamma) to the alpha firm. What happens to costs of production in alpha in response to an increase in production then depends on the magnitude of the transfer. Again, the general context is that if a firm or an industry employs only a small portion of the “constant” factor, it is more likely to meet an increase in its production by drawing “doses” of the constant factor from other industries than by intensifying its own use of it.

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  Farm Managerial Economics

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  However, this law is also not applicable to agriculture. The MPP for law of constant (marginal) returns is given by, (Δ 1 Y/ Δ 1 X)=(Δ 2 Y/Δ 2 X)=(Δ 3 Y/Δ 3 X) = –––=(Δ n Y/Δ n X) . iii. Diminishing (Marginal) Returns to a Variable Factor or LDR In LDR, each additional unit of a variable input when applied to a fixed level of other inputs, it will add less amount of additional output to the total output than the preceding unit of an additional input. Due to increase in total output at diminishing rate, both MPP and APP also decreases for every additional unit of an input. Inversely, from cost point of view, it is termed as ‘Law of increasing (marginal) costs’, as the MC goes on increasing for every additional unit of an input. This is because, each and every additional unit of an input is accompanied by less than proportionate increase in output and thereby, the MC of each unit of an input goes on increasing. This concept of LDR was first proposed by Turgot, but Malthus and Ricardo have refined this concept. In the words of Marshall, ‘keeping the fixed factors constant, when marginal product diminishes with the increase in the quantities of a variable factor, it is called law of diminishing (marginal) returns’. According to Boulding, ‘as we increase the quantity of one input which is combined with a fixed quantity of other inputs, the marginal physical productivity of the This ebook is exclusively for this university only. Cannot be resold/distributed. variable input must eventually decline’. In the words of Joan Robinson, ‘the law of diminishing (marginal) returns states that, with a fixed amount of any one factor of production, successive increases in the amount of other factors will, after a point, yield a diminishing increment of the product’ . The LDR is explained through the following Table 2.4.

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  Intermediate Microeconomics with Microsoft Excel

  • Humberto Barreto(Author)
  • 2009(Publication Date)
  • Cambridge University Press

    (Publisher)

  Instead, the law says that, eventually, diminishing returns will set in. As more and more labor is used, total product reaches its maximum point (where marginal product is zero). Beyond this point, we are in a range of negative returns. This is a theoretical possibility, but not a practical one. No profit-maximizing firm would ever operate in this region because you can get the same amount of output with fewer workers. The range of negative returns is denoted by the values of L that have light-green backgrounds. Notice the relationship between the marginal and average product curves. It is no coincidence that the marginal product curve intersects the average product curve at the maximum value of the average product curve. There is a guaranteed relationship between marginal and average curves: When-ever the marginal is greater than the average, the average must be rising and whenever the marginal is less than the average, the average must be falling. Thus, the only time the two curves can meet is when the marginal equals the average. Figure 2.1.1.5 clearly shows this to be the case. Step Change the parameter for the b coefficient from 30 to 40. Notice that the S shape becomes much more linear. The range of increas-ing returns is larger and we do not hit negative returns over the observed range of L from 0 to 25. Step Set the parameter for the b coefficient to 80. Over the observed range of L from 0 to 25, we see only increasing returns. Step Change the L parameter from 1 to 2. This makes L increase by 2 and the range goes from 0 to 50. You can see that diminishing returns do kick in; it just takes more labor for The Law of Diminishing Returns to be observed when the b coefficient is set to 80. One confusing thing about The Law of Diminishing Returns has to do with another concept called returns to scale .

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  Macroeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  The curve is upward-sloping, because more labor produces more output. The curve gets flatter and flatter because of The Law of Diminishing Returns: the increases in output get smaller and smaller as more and more labor is used. Economies of Scale Diminishing marginal returns occur when only one input is increased and, importantly, all other inputs are held constant. But what happens if all inputs are increased at once? Double all the inputs—twice as much labor, capital, and natural resources—and does output double? Does it more than double? Does it increase, but not to the point of doubling? When all inputs are doubled and as a result there is twice as much output—double the inputs produces double the output — economists say the economy exhibits constant returns to scale. The inputs are the scale of production. When there are constant returns to scale, the return to increasing the scale is 1: double the inputs produces double the output; 1.7 times the inputs produces 1.7 times the output. When all inputs are doubled and as a result there is more than twice as much output—double the inputs produces more than double the output—economists say the economy exhibits economies of scale or increasing returns to scale. When 78 Chapter 5 Long-Run Economic Growth there are economies of scale, the return to increasing the scale of production is more than 1: double the inputs produces more than double the output; 1.7 times the inputs produces more than 1.7 times the output. When all inputs are doubled and as a result there is less than twice as much output—double the inputs produces less than double the output—economists say the economy exhibits diseconomies of scale or decreasing returns to scale. When there are diseconomies of scale, the return to increasing the scale of production is less than 1: double the inputs produces less than double the output; 1.7 times the inputs produces less than 1.7 times the output.

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  Karl Marx and the Classics

  An Essay on Value, Crises and the Capitalist Mode of Production

  • John Milios, Dimitri Dimoulis(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  7

  The “Law of the Falling Tendency in the Rate of Profit”

  1. Introduction

  In Part IV of the book we are going to deal mainly with questions of instability and economic crises, deriving theoretical arguments and conclusions on the one hand from Marx’s concepts and analyses and on the other from the historic Marxist controversies on these subjects. However, before approaching our main theme, we are going to compendiously refer to Marx’s “law of the tendential fall in the rate of profit”, which for more than a hundred years has become a matter of dispute among Marxist scholars.

  The tendency of the rate of profit to fall had become part of the economists’ credo since the time of the Classical School of Political Economy. Ricardo tried to interpret it as a symptom of the “law of diminishing returns”. The functioning of this “law”, bringing about on the one hand an increase in the (real and monetary) returns paid by farmers (capitalist tenants) to landowners, on the other an increase in nominal (monetary) wages, owing to rise in prices for wage commodities, would lead to a corresponding fall in (real and monetary) profits.

  Through the law of the falling tendency of the rate of profit, Marx attempted to show that technological innovation - which is introduced into production by the individual capitalist in a context of competition and aims at increasing the productivity of labour (and so the rate of surplus value) -could be the cause of such a phenomenon. He based his analysis on the concepts of technical composition of capital (which connotes the quantity in material terms of means of production per unit of living labour) and value (or organic) composition of capital (the ratio of constant to variable capital, in value terms).

  2. Marx’s Main Arguments

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  Understanding Development Economics

  Its Challenge to Development Studies

  • Adam Fforde(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  The Harrod–Domar model thus shows how a series of identities obtained from the NIA framework encourages thinking in particular ways and may influence economic behavior. We now turn to the Solow model, which shows how powerful currents in DE argue about the determinants of important variables within the overall NIA approach to understanding economic change and so development.

  Solow model

  Recall that mainstream DE views the return to capital as essentially a return to a physical input. At aggregate levels the metaphor used is that of a factory: so much goes into production and so much output results. Thus standard naive DE theory argues that there should be “diminishing returns” to all inputs, including capital.11 This changes the algebra to make the COR dependent on the level of per cap GDP and opens the way to a discussion of the possibility of convergence, which is delivered through a production function. The standard idea is that “this represents the technical knowledge of the economy” (Ray, p. 65)—that is, it relates output (GDP) to capital and labor inputs. Some of the questions that arise here, especially the conceptualization of just how factor incomes (which are measured) can be related to physical inputs of those factors, are discussed in greater detail in the next chapter. This requires discussion of how these factor inputs are priced. Here we simply assume that these matters have been conceptually resolved.

  The algebra shows what is intuitively obvious. If GDP is functionally dependent upon capital and labor inputs, and the population increases (for some reason), eventually the economy grows to a point at which diminishing returns to capital “creates a downward movement in the capital–output ratio as capital is accumulated faster than labor” (p. 67). The lower capital– output ratio then brings down the rate of growth of capital in line with the growth of labor, so that the long-term capital–labor ratio is constant, driven down to the rate at which increases in the capital stock lead to no increase in output; all output gains come from increases in population, so that per capita growth is zero. GDP growth equals the population growth rate. The rate of savings does not matter—an increase in savings simply increases the capital stock so the returns can fall even more. A higher per capita capital stock simply raises the ratio between capital and output. This is simply algebra, but also, if the conceptual framework treats capital as a physical input, leads to some puzzles.

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