Explain law of diminishing marginal returns.

Table and diagram. The following table and diagram further clarify the law. when more and more units of labour are applied in a given plot of land, marginal product goes on falling as shown below:

It would be observed from the above table and diagram that when more units of labour are employed with a given quantity of fixed factor (land), TPP increases at a diminishing rate or MPP goes on falling. That is why shape of MPP curve is downward sloping. Mind, the law operates if technology does not change, i.e., there is no improvement in state of technology.

Importance. This law is called a universal law because tendency to diminishing return is all pervading. The law applies without fail sooner or later in every field of production. Nothing can stop the operation of this law. Its application is all pervading. If tendency to diminishing returns could be removed somehow, all economic problems would be solved.

(c)    Reasons for operation of law. The reasons why diminishing returns appear are:

(i)    Use beyond optimum capacity. After achieving optimum combination of variable and fixed factors, efficiency starts declining when more units of a variable factor are employed. As a result marginal product starts falling.

(ii)    Lack of perfect substitution between factors. Up to a certain limit, factors of production can be substituted for one another, e.g. more labour can be employed instead of machinery but beyond a certain stage, this is not possible. The factors become imperfect substitutes leading to diminishing returns.

(iii)    Fixity of the factor. When more units of a factor are combined with fixed factor, quantity of fixed factor inputs per unit of variable factor falls. This adds decreasing return to total product. In other words, fixed factor becomes too small.

(iv)    Scarcity of factors.

Note. Although 'Returns to scale' is now out of syllabus yet for better understanding of 'Law of Returns', it is briefly given here.