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Law of Diminishing Returns

Law of Diminishing Returns

Meaning and Definition of Law of Diminishing Returns 

Marshall stated the law as, An increase in capital and labour applied in the cultivation of land causes in general less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture.

“The phrase in general in this statement is important. It means that there may be cases where the law does not hold good. It refers to limitations of the law.

Assumptions of the Law

The law of Diminishing Returns is based on the following assumption:-

  1. It is based on the assumption that the techniques of production remain constant or no improvement taken place in the methods and techniques of production. If any improvement occurs in the methods and techniques of production, then the additional returns to the variable factors may be more than proportionate. However, if, on the contrary, the methods and techniques of production remain unchanged, the additional returns to the variable factors, after a point will be less than proportionate.
  2. The law is based on the assumption that the various units of the variable factors are exactly similar to each other. If the units of the variable factors are dissimilar, incremental output due to them may actually be larger than before.
  3. The law of Diminishing Returns is based on the assumption that the proportion in which the various productive factors may combine should be variable. The law will fall to work if the proportions between factors are fixed.

Law of Diminishing Returns in General Form

The discussion of the law of diminishing returns in relation to land, since the times of the English Classical economists, has obscured its real significance. There is nothing peculiar about agriculture for the law to be exclusively associated with it. As a matter of fact, in agriculture, the law has been held in check by scientific cultivation in progressive countries. This is evident from the fact that whereas consumption of food has increased on account of higher standards of living, the number of people engaged in the production of food has actually gone down.

The fact is that the law of diminishing returns does not apply to agriculture alone. It has got a general application and can, therefore, be put in a general from. “The law of diminishing returns simply refers to principle of combination of the factors. In a general way, it can be stated that if a variable factor is combined with some constant factors, the average and the marginal returns for that variable factor will diminish. Benham states the law thus, “As the proportion of one factor in combination of factor is increased after a point the average and marginal product of that factor will diminish.”

Causes of Diminishing Returns in Agriculture

The law operates in intensive cultivation because the supply or land is fixed, while the quantities of labour and capital can be increased at will. It is the fixity of the supply of land which sets the law in motion in the case of intensive cultivation. Even the fixity of the supply of land would be no problem if one or both of the variable factors, i.e. labour and capital were perfect substitutes of land. The deficiency of land in that case would be made up by increasing the supply either of capital or of labour. However, the difficulty here is that neither labour nor capital is a perfect substitute of land. In other words, the elasticity or substitution between land, on the one hand, and labour and capital on the other, is not infinite. It is the denial of the infinite elasticity of substitution between factors of production which is responsible mainly for the operation of the law of Diminishing Returns.

Thus, it is evident that the law operates in intensive agriculture because the supply of land is limited in relation to labour and capital because labour and capital are not perfect substitutes of land, and because after a point continual increase in the doses of labour and capital removes the combination of productive factors away from the point of optimum proportions. Even if the factors of production were perfect substitutes, the law would still operate because of the limited capacity of the organizer for the work of control and supervision. After a point, the task of control and supervision would become so cumbersome and complex that it would not be possible to keep the wastages (or raw materials and labour power) under check.

Illustration of the law of variable Proportions (Diminishing Ratio)-

To illustrate the working of the law of variable returns let us take the hypothetical production schedule of a firm given in table below-


Law of Diminishing Return

It is clear from the figure of above table-

  1. If interesting unit of labour are added of fixed quantity of land, the total production (TP) first rises at an increasing rate upto 3 units of labour, afterwards it rises at decreasing rate.
  2. When 6 labourers are engaged, TP is maximum.

It begins to decline when 8 labourers are employed. That is to say marginal product increases over a certain range of input upto a point after which it decreases and eventually become negative.

Limitation of this Law

There are certain limitations to the application of the law of diminishing marginal production. They are the following:

  1. Improved methods of cultivation:

    According to this law as the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average output of that factor will diminish. This assumes that the state of technical knowledge is given and that there are no ‘economics of scale.’ This law does not work effectively if the farmers adopt better and improved techniques of production.

  2. New Soil:

    Similarly, this law is not applicable when new soil, not being used for cultivation till now, is brought under the plough. Since the fertility of the soil is high the production increases at a faster rate in the beginning when cultivation is done on this Soil.

  3. Insufficient Capital:

    If the farmers are not using a sufficient amount of capital then the production will increase at a faster rate when more capital is used. Later; the marginal production may decrease.

Thus, the law of diminishing returns is applicable in a short period in the long period the state of technology does not remain the same and so the law does not operate. Improvements in technical knowledge will take place as time goes on, but during a short period the state of technical knowledge is given. When improved techniques are discovered and applied, various combinations of factors will give a greater output than at present.

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