The Law of Diminishing Marginal Returns
The falling MPL is due to the law of diminishing marginal returns. The law states,”as units of one input are added (with all other inputs held constant) a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline.” The law of diminishing marginal returns applies regardless of whether the production function exhibits increasing, decreasing or constant returns to scale. The key factor is that the variable input is being changed while all other factors of production are being held constant. Under such circumstances diminishing marginal returns are inevitable at some level of production.
Diminishing marginal returns differs from diminishing returns. Diminishing marginal returns means that the marginal product of the variable input is falling. Diminishing returns occur when the marginal product of the variable input is negative. That is when a unit increase in the variable input causes total product to fall. At the point that diminishing returns begin the MPL is zero.
Read more about this topic: Marginal Product Of Labor
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