Diminishing marginal product, law of

Updated: Aug 20, 2021

This is a hypothesis concerning the nature of production processes which is of central importance in economics; it asserts that if the quantity of one factor of production used in a production process is increased and all others held constant, then the marginal product of the factor will at some point start to decrease. That is, successive equal increments of one factor result after some point in smaller and smaller increments in output, all other factors remaining unchanged. This can loosely be thought of as resulting from the fact that the units of the factor which is increasing in quantity have fewer and fewer of the other factors to work with – there will ultimately be a kind of ‘saturation effect’. The hypothesis is assumed to hold in all production functions used in economics. It underlies the res ult that the firm’s short-run demand curve for a factor of production will slope down­ward from left to right, and that the firm’s short-run marginal cost curve will slope upward from left to right. These in turn are important elements in ensuring a determinate short-run equilibrium position for the firm. The hypothesis should not be confused with the assump­tion of diminishing returns to scale. The latter concerns what happens to output when all factors of production are allowed to increase in the same proportion, whereas the law of diminishing mar­ginal product is concerned with an increase in the ratio of one factor to the others. One is relevant to the long-run analysis of the theory of the firm, the other to the short-run.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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