An increase in one input while holding other inputs steady will lead to a rise in output. But this rise will not be consistent. The increase in output may be substantial in the initial stages, but additional units of the input will lead to slower growth in output. After a certain point, the output may stop increasing or may even go down. This is because of the law of diminishing marginal productivity.
What does diminishing marginal product mean?
The concept of diminishing marginal product can be understood by thinking about the productivity of a farm. The output of a farm is dependent upon various factors. Fertilizers, pesticides, farm machinery, and labor contribute to productivity. Now, if the amount of fertilizer that is used is increased while holding other factors steady, it is likely that the crop yield will go up.
Additional units of fertilizer will produce a steadily higher output. But this will not continue. If more fertilizer is added to the soil, the output is likely to taper off. In fact, there will be a stage when the ground becomes overloaded with fertilizer and adding more will lead to a fall in yield.
The law of diminishing marginal product is applicable in other types of situations too. Increasing the number of workers in a factory may lead to an increase in output initially. However, the rise in production will taper off and then start decreasing as more workers are added.
Example of diminishing marginal product
Andersen Manufacturing Company produces electrical switchboards. To increase production, it adds workers while keeping other inputs constant. The factory manager notices that output rises at first, but then the increase slows down. The number of units that is produced changes in the following manner:
The law of diminishing marginal product applies when the number of workers in the factory is 22. After this point, the number of switchboards that are produced every month stabilizes and then starts going down.
Adding more input does not always lead to more output. The law of diminishing marginal product tells us that beyond a point, additional units of input will lead to a decrease in output.