LAW OF DIMINISHING RETURNS
Statement of the Law. In the absence of the law of diminishing returns, “the science or political economy”, says Cairnes, “would be as completely revolutioniscd asif human nature itself were altered”. Such is the importance of the law of diminishing returns in economic theory. Tbe law of diminishing returns was supposed to have :i special application to agriculture.It is the practical experience of every fanner that “successive applications of labour and capital to a given area of land must ultimately, other things remaining the same, yield a less than proportionate increase in produce.” If by doubling labour andcapiLal he could double the yield of his land and so on, it can be easily seen that une acreof land could be m3-de to produce as much wheat as could suffice for the entire population of the world. That this cannot be done is simply due to the operation of the law of diminishing returns. If investment is increased, the total yield will no doubt incr ease,but at a diminishing rate. ~l stated the law thus: “An increase in capital and labour applied in th cultivation of land causes ill gcncral l than proportionate increase ill the amoun of produce raised, unless It happen to coincide with an improvement ill the art agriculture.” The phrase ‘in general’ in thi statement is important. It means that may be cases where the law does not hold good. It refers to limitations of the la Three Aspects of the law. Consider the table below.
From the table, it appears that there are three different aspects of the Law of Diminishing Returns: (1) Law of Total Diminishing Returns(Column 2). In this sense, the return begin to diminish from the 9th worker. Every successive worker
employed does make some addition to the total output. But the 8th adds nothing and the 9th and 10th arc a positive nuisance. As workers cannot be had gratis,
no prudent farmer will employ more than seven workers in the conditions represented by this table. t 2) Law of Dimini .••hjn~ Marginal Returns (Column 3). Marginal returns go on increasing up to the 3rd worker. This i so becasuc the proportion of workers to land was at first insufficient and the land was not being properly tilled. This phase of cultivation is unstable and will not be found in practice. When the farmer knows that he can get more than proportionate return by employing extra hand, he will certainly do so. TIle marginal, i.e.• the additional, return goes on falling from the 3rd man onwards till it dropsdown to zero at the Sth. The 9th and 10lh men are merely a cause-of obstruction to the others and arc
responsible in making the mar ginal return negative.TIle point at which the addition made to the total output by each successive unit of the variable factor starts diminishing is known as the point of diminishingmarginal returns. It can be seen that the total 0111111I1j~ ut its maxi- when marginal output It should be remembered that the marginal return is not what can be attributed to the last unit whose employment is considered just worthwhile, as all menare supposed to be alike. TIle marginal return is simply the addition that the marginal unit makes 10 the total return,