Production Theory - Diminishing Marginal Returns

Diminishing Marginal Returns

These curves illustrate the principle of diminishing marginal returns to a variable input (not to be confused with diseconomies of scale which is a long term phenomenon in which all factors are allowed to change). This states that as you add more and more of a variable input, you will reach a point beyond which the resulting increase in output starts to diminish. This point is illustrated as the maximum point on the marginal physical product curve. It assumes that other factor inputs (if they are used in the process) are held constant. An example is the employment of labour in the use of trucks to transport goods. Assuming the number of available trucks (capital) is fixed, then the amount of the variable input labour could be varied and the resultant efficiency determined. At least one labourer (the driver) is necessary. Additional workers per vehicle could be productive in loading, unloading, navigation, or around the clock continuous driving. But at some point the returns to investment in labour will start to diminish and efficiency will decrease. The most efficient distribution of labour per piece of equipment will likely be one driver plus an additional worker for other tasks (2 workers per truck would be more efficient than 5 per truck).

Resource allocations and distributive efficiencies in the mix of capital and labour investment will vary per industry and according to available technology. Trains are able to transport much more in the way of goods with fewer "drivers" but at the cost of greater investment in infrastructure. With the advent of mass production of motorized vehicles, the economic niche occupied by trains (compared with transport trucks) has become more specialized and limited to long haul delivery.

P.S.: There is an argument that if the theory is holding everything constant, the production method should not be changed, i.e., division of labour should not be practiced. However, the rise in marginal product means that the workers use other means of production method, such as in loading, unloading, navigation, or around the clock continuous driving. For this reason, some economists think that the “keeping other things constant” should not be used in this theory.