Diminishing Marginal Productivity - Explained
What is Diminishing Marginal Productivity?
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Table of ContentsWhat is Diminishing Marginal Productivity?How does the Law of Diminishing Marginal Productivity Work?Examples of Diminishing Marginal UtilityAcademic Research on the Law of Diminishing Marginal Productivity
What is Diminishing Marginal Productivity?
The Law of Diminishing Marginal Product is an economics concept. It says that, at early stages of production, if we increase 1 production variable and the rest of the things remain the same, the product total production may increase. If, however, we continue to increase the input of that production variable, it will produce lesser returns (on average) per production variable. In simple words, an increase in the quantity of 1 production variable will increase the output up to a certain point. After that point, it will give less gain for each unit added. The return on investment goes down.
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How does the Law of Diminishing Marginal Productivity Work?
The Law of Diminishing Marginal Productivity applies to all types of businesses, including service providers, manufacturing concerns, and software houses. This phenomenon shows that despite having the resources to afford maximum machinery or labor, it will not result in greater productivity after a certain point. The reason is that it becomes less efficient and then, inefficient. To be aware of the cost efficiency, a producer should be able to understand at what point, the Diminishing Marginal Productivity begins to have an adverse effect on business.
Examples of Diminishing Marginal Utility
- If a child eats a candy, it tastes sweet to him. When he eats 2nd candy, the satisfaction will become less than the 1st one. On 3rd candy, satisfaction will decrease more.
- When a person holds his breath into the water, he feels pleasant when he comes out for air and takes his first breath. The 2nd breath will give satisfaction but not like the 1st one. Similarly, his satisfaction will further decrease as he takes more breaths afterward.
As you can see in these simple examples, we use more input units, with other certain fixed inputs. Initially, it may give more output in a fast turnaround. But gradually, it will produce less output at a diminishing rate. Thats why business owners, who want to expand their production, should apply The Law of Diminishing Marginal Productivity (DMP) before increasing any input to production (e.g., labor, raw material, etc.) Suppose, there is a factory producing widgets. It uses electricity in the same amount to generate 0 to 100 widgets, but overworking reduces the efficiency of the machinery. It will also increase the electricity consumption exponentially at the point when production is one hundred and one widgets. The marginal productivity increases, when the output reaches one hundred widgets. This is because the company can produce higher volumes and sell without any additional expense of production. However, after exceeding the production of one hundred marks. Production cost begins to increase more rapidly as compared to the output volume. Ultimately, the exponential increase in the cost of electricity subsumes profit of every widget. In order to keep making profits, the company needs to explore more options, such as lessen the volume of output, buy new machinery consuming less power, etc.The marginal productivity can be calculated with the help of a formula.MP = changes in the total number of produced units / changes in the input of a single variable. For instance, suppose a production line has made a hundred toy cars in one hour. The company adds a new machine to the production line. Now, it will make five hundred toy cars within one hour. The change in the total number of produced units is four hundred. This is basically the difference in five hundred toys made by the production line now vs hundred toys it made earlier. It was done with the help of one more machine. Hence, the marginal product is 400/1 or 400/400. Likewise, a hotel makes fifteen pizzas with four chefs. If the manager adds 2 more chefs, the hotel will be able to make thirty pizzas, now. The marginal product becomes 7.5 or fifteen extra pizzas divided by 2 extra workers hired.
- Production Function
- Aggregate Production Function
- Inputs - Factors of Production
- Capital (Factor of Production)
- Labor Theory of Value
- Production Possibilities Frontier
- Capacity Utilization Rate
- Value of Marginal Product
- Diminishing Marginal Productivity
- Comparative Advantage