Economics (NCERT) Notes → Class XII

3.5 The Law of Diminishing Marginal Product

Total Product, Marginal product and Average product
 
Analysis of Marginal Product
•MP first increases (upto 3 units of labour) and then begins to fall.
•This tendency of the MP to first increase and then fall is called the law of variable proportions or the law of diminishing marginal product.
•Law of variable proportions say that the marginal product of a factor input initially rises with its employment level. But after reaching a certain level of employment, it starts falling.
 
Factor Proportions
•Factor proportions represent the ratio in which the two inputs are combined to produce output.
•As we hold one factor fixed and keep increasing the other, the factor proportions change.
•Initially, as we increase the amount of the variable input, the factor proportions become more and more suitable for the production and marginal product increases.
•But after a certain level of employment, the production process becomes too crowded with the variable input.
•For example, if a farmer has one acre of land, the productivity will go up initially when he adds the labour. However, it will start reducing after reaching a point.
 
Total Product Curve
 
•An increase in the amount of one of the inputs keeping all other inputs constant results in an increase in output.
•The total product curve in the input-output plane is a positively sloped curve.
•With L units of labour, the firm can at most produce q1 units of output.
 
Marginal product curve 

•The marginal product of an input initially rises and then after a certain level of employment, it starts falling.
•The MP curve therefore, looks like an inverse ‘U’-shaped curve.
 
Average product curve
•For the first unit of the variable input, one can MP and the AP are same.
•Now as we increase the amount of input, the MP rises.
•AP being the average of marginal products, also rises, but rises less than MP.
•After a point, the MP starts falling.
•As long as the value of MP remains higher than the value of the AP, the AP continues to rise.
•Once MP has fallen sufficiently, its value becomes less than the AP and the AP also starts falling.
•So AP curve is also inverse ‘U’-shaped.
 
Average product curve
•As long as the AP increases, it means that MP is greater than AP.
•When AP falls, MP has to be less than AP.
•Thus MP curve cuts AP curve from above at its maximum.
•The AP of factor 1 is maximum at L.
•To the left of L, AP is rising and MP is greater than AP.
•To the right of L, AP is falling and MP is less than AP.



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