3.4. The Law of Diminishing Marginal Product and the Law of Variable Proportions

If we plot the data in table 3.2 on graph paper, placing labour on the X-axis and output on the Y-axis, we get the curves shown in the diagram below. Let us examine what is happening to TP. Notice that TP increases as labour input increases. But the rate at which it increases is not constant. An increase in labour from 1 to 2 increases TP by 10 units. An increase in labour from 2 to 3 increases TP by 12. The rate at which TP increases, as explained above, is shown by the MP.

In this chunk, we are examining the relationship between labour input and total product (TP), which is the total output produced. As we add more labour, the total output increases, but the increase isn't consistent. For example, adding labour from 1 to 2 increases output by 10 units, but adding from 2 to 3 increases it by 12 units. This demonstrates that while more labour generally leads to higher output, the efficiency of each additional unit of labour—illustrated by marginal product (MP)—changes as we employ more workers.

Think of a factory assembly line. When the first worker joins the line, they can assemble a significant number of parts quickly because there’s plenty of space and materials for them to use. When a second worker joins, they can also be efficient, and the total output shoots up. However, as more and more workers are added, they may start getting in each other's way, decreasing the productivity of each additional worker. This reflects the concept of diminishing returns.

Notice that the MP first increases (up to 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 says 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.

The law of variable proportions explains how the output changes as we increase the input of one factor while keeping others fixed. Initially, as we employ more labour, the marginal product—how much extra output we get from one more unit of labour—goes up. However, once we reach a certain point, adding even more labour leads to a decrease in marginal productivity. This happens because the fixed inputs (like land or machinery) can't support the increasing number of workers effectively, leading to less efficient production.

Consider a cooking team preparing a large meal. At first, adding more chefs allows for faster meal preparation because each chef can manage specific tasks, utilizing all available cooking space. However, if too many chefs crowd into the kitchen, they might start getting in each other's way, making the whole process less efficient. This is a real-world application of the law of diminishing returns.

Why does this happen? In order to understand this, we first define the concept of 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.

Factor proportions indicate how different inputs are combined to produce output. When we increase one input while keeping another constant, the relationship between these inputs changes. In the beginning, this combination works well for increasing production. However, as we add more of the variable input (like labor), we reach a point where more workers lead to overcrowding. This overcrowding causes each additional worker to add less and less to the total output, resulting in diminishing returns.

Imagine a tennis court where players are practicing their swings. With a few players, they can practice efficiently, each taking turns. However, if too many players crowd the court, they can't swing freely, and practice becomes inefficient. This illustrates how the ratio of players to available space affects overall productivity.

We can use these observations to describe the general shapes of the TP, MP, and AP curves as below.

The shapes of total product (TP), marginal product (MP), and average product (AP) curves help us visualize how output changes with variations in input levels. Typically, the TP curve rises as more input is utilized but does so at a decreasing rate after a point due to diminishing returns. The MP curve initially rises, reflecting increasing efficiency when additional input is added, and then it falls, illustrating diminishing returns. The AP curve behaves similarly, as it represents average efficiency, rising when marginal product is above average and falling when it drops below average.

Consider studying for a test. At first, each additional hour studied significantly boosts your understanding and grades (high marginal product). But after studying for several hours, you may start to feel tired, and each additional hour contributes less to your knowledge (diminishing marginal product). Graphing your study hours may show a rising slope soon starting to flatten out—a reflection of this principle.

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