Using production functions, we can understand one of the-most famous laws in all economics. the law of diminishing returns:
The law of diminishing returns holds that we will get less and les••extra output when we add additional doses of all input while holding other inputs fixed. In other words. thc marginal product of each unit of input will decline as the amount of that input ill creases. holding all other inputs constant. The law of diminishing returns expresses a “ery basic relationship. As more of an input such as labor is added to a fixed amount of land. machinery, and other inputs. the labor has less and less of the other
The table shows the total product that can be produced for different inputs of labor when other inputs (capital, land. etc.) and the stale of technical knowledge are unchanged. From total product, we can derive important Coil. excepts of marginal and average products.
factors to work with. The land gets more crowded. the machinery IS overworked, and the marginal product of labor declines.
The law of diminishing returns can be fleshed out by putting ourselves in the boots of a farmer per.
forming an agricultural experiment illustrated by Table 6-1. Given a fixed amount of land and (}the~ inputs, assume that we use no labor inputs at all. With zero labor input there is no corn output. Hence. Table 6-1 records zero product when labor i~ zero, Now add 1 unit of labor to the same fixed amount of land, \Ye observe that 2000 bushels of corn arc produced. In the next stage of our controlled experiment. we continue to hold other inputs fixed and go from I unit of labor to 2 units of labor. The second unit of labor adds only 1000 bushels of additional output, which is less than what the first unit of labor added. The third unit of labor has an even lower marginal product than does the second. and the fourth unit adds yet a bit leu. The experiment reported in Table 6-1 thus illustrates the law of diminishing returns.’
Figure 6-1 also illustrates the law of diminishing returns for labor, holding land and other inputs constant, Here we see that the marginal product curve declines as labor inputs increase, which is the precise meaning of diminishing returns. In Figure 6-1 (a), diminishing returns are seen as a concave or dome-shaped total product curve.
What is true for labor is also true for land and any other input. We can interchange land and labor, now holding labor constant and varying land. Land’s marginaJ.product is the change in total output that results from I additional unit of land, with all other inputs held constant. We can calculate the marginal product of each input (labor, land, machinery, water. fertilizer, etc.). and the arginal product would apply to any output. (wheat, corn, steel, soybeans, and so forth), We would find that other inputs also tend to show the law of diminishing returns.
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