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Law of Diminishing Returns to a Factor
Illustration of Diminishing Returns to a Factor
Typically, increased specialization and better utilization of other factors in the production process allow factor productivity to grow.
Diminishing Returns to a Factor Concept
The law of diminishing returns (the law of diminishing marginal returns) states that the marginal product of a variable factor must eventually decline as more of the variable factor is combined with other fixed resources.
ridge lines marginal revenue product economic efficiency net marginal revenue isocost curve (or budget line) constant returns to scale expansion path increasing returns to scale decreasing returns to scale output elasticity power production function productivity growth labor productivity multifactor productivity
inputs in small increments.
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Returns to Scale and Returns to a Factor
Returns to scale measure output effect of increasing all inputs.
Returns to a factor measure output effect of increasing one input.
If MPX=∂Q/∂X> 0, total product is rising. If MPX=∂Q/∂X< 0, total product is falling (rare).
Average product
APX=Q/X.
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Total, Marginal, and Average Product
Production Analysis and Compensation Policy
Chapter 5
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Chapter 5 OVERVIEW
Production Functions Total, Marginal, and Average Product Law of Diminishing Returns to a Factor Input Combination Choice Marginal Revenue Product and Optimal Employment Optimal Combination of Multiple Inputs Optimal Levels of Multiple Inputs Returns to Scale Production Function Estimation Productivity Measurement
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Chapter 5 Kon function discrete production function continuous production function returns to scale returns to a factor total product marginal product average product law of diminishing returns isoquant technical efficiency input substitution marginal rate of technical
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Production Functions
Properties of Production Functions Production functions are determined by
technology, equipment and input prices. Discrete production functions are lumpy. Continuous production functions employ
Observations:
When MP = 0, TP is at its maximum When MP > AP, AP is increasing When MP < AP, AP is decreasing When MP = AP, AP is at its maximum
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Law of Diminishing Returns to a Factor
In practice it is very rare to see input combinations that exhibit increasing returns for any factor. With increasing returns to a factor, an industry would come to be dominated by one very large producer―and this is seldom the case. Input combinations in the range of diminishing returns are commonly observed.
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Total, Marginal, and Average Product
Total Product
Total product is total output.
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Marginal Product
Marginal product is the change in output caused by increasing input use.