Law of Diminishing returns ill a General Form
The discussion of the (a of diminishing returns in relation to land, since the times of the English Classical economists. has 0 ureJ its real significance. There is nothing peculiar • )lit agriculture for the law to be exclusively as ociated with it. /\s a matter of fact. in agriculture, the la has been held in check by scientific cultivation in pr regressive countries. This is evident from the fact that hcreas consumption uf food
has increased on unt of higher standards of living, the number of people engaged in the production of food has actually gone down. The facl is that the law of diminishing returns docs not apply to agri u ture alone. It has got a general application and can, therefore. be put in a general form. The law of dimini hing returns simply refers to a principle of com in. lion of’the factors. In a general way, it can be stated that if a variable factor is combined withsome constant factors. the average and the marginal return for that variable factor will diminish, Ben ham states the la thus: “As the proportion uf 0111′ factor ill a combination of Iactors is incensed ufter a puint the and marginal product of thaI furtnr will diminish Ih I aw uf Distinguish Returns Opcrales TIle operation of the law of dilllini,sling returns can be attributed to several causes:(i) t\ rung Combustion. In the initial stages. the fixed factor is not fully used since the units of variable factor arc too few. Hence, increase in the v:u iahle factor ill the initial Mages proves productive (III account offuller localisation of the fi xed factor and of better co-operation and greater specification in the variable factor units. We arc moving towards the optimum combination. But after a stage, increase in the variable factor brings down the marginal return. Thus, the law of diminishing returns operates because the combination of the factors of production ceases to represent a correct proportion. It ceases to be an optimum combination. There is too much of one factor in relation to the others. l11C fixed factor has reached its maximum capacity and there is no further possibility of spiritualistic of the variable factor.
This explains the operation of the law of diminishing returns. When proper balance is restored the law of diminishing returns will no longer operate. But the law of diminishing returns is a misnomer. We saw that in the beginning the marginal return increases. It is only ultimately the law operates. This is why Bounding calls it “the law of eventually diminishing marginal physical productivity.”(ii) Scarcity of Factors. The law of diminishing returns operates due to the scarcity of the factors of production. In the words of Chapman, “The expansion of all industry provided that additional supplies of in production initial cannot obtained, is invariably accompanied at eventually decreasing returns, other things.
(iii) pluperfect Substitutes, A little reflection will show that the law of diminishing returns operates because the factors of production arc imperfect substitutes for one another, As Mrs. Robinson says, “What the Law of Diminishing Return really states is that there is a limit to the extent to which one factor of production can be substituted for another. or , in other words.that the elasticity of substitution between factors is not infinite. If this were not true it would be possible when one factor of production is fixed in amount the rest arc in perfectly elastic supply, tu produce part or the output with the aid of the fixed factor, and then.when optimum proportion between this factor and other factors was attained. to substitute some other factor fur it and to increase output at constant cost. Thus, the Law of Discerning Returns entails that the carious Clements required for the production of an) commodity should be divided into groups, each group being a factor of production, in such a way that the elasticity of substitution between one factor and another is less than infinite: