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The Law of Diminishing Marginal Returns

This law states that “An increase in the capital and labour applied to the cultivation of land causes in general a loss than the proportionate increase in the amount of produce raised unless, it happens to coincide with an improvement in the art of agriculture”

Dr. Marshall has stated this law which pertains to physical returns simply it state that in Agriculture Production it is observed that with an increase in variable inputs applied, the production initially increases with increasing rate, then at constant rate and eventually it declines.

But this law will not be hold true (limitation) when there is

  1. An improvement in technology,

  2. Efficient management and

  3. Residual effect

This law is ‘physical law’ broadly speaking; the law is generalization based on experience, that the use of increased inputs leads to less than proportionate increase in output. There are three stages of the law of diminishing returns. They are 1) stage I 2) stage II and 3) stage III. The positions of the parameters i.e. TP (Total Product), AP (Average Product), MP (Marginal Product) and EP (Elasticity of Production) in different stages of production are as under.

Stage – I
1) This stage starts from origin and ends where AP & MP curves intersect each other.
2) The TP is increasing at increasing rate at first then at decreasing rate.
3) PP and MP both increase but MP is grater than IP.
4) The EP is greater than 1 (one)

Stage – II
1) It starts where PP & MP intersect each other and EP = l. It ends when MP = 0
2) TP increases but at decreasing rate.
3) MP Starts to decline continuously and AP also start to decline but it is greater than MP
4) The elasticity of production (EP) is greater than zero but less than 1.

Stage – III

1) This stage starts when MP is zero and TP is at maximum.
2) TP starts to decline and it declines continuously.
3) MP becomes negative, remains positive.
4) EP is always less than zero.

Rational State of Production: When cultivator is undertaking production on his farm, his prime objective is to maximize his returns. The TP curve indicates only total production but MP curve represents rate of returns. Therefore the position of MP is very important for deciding how much to produce. Therefore the rational stage of production is always Stage No. II
It is because of the reason that in this stage MP and AP are positive. MP dec1ines but positive. Similarly EP is also positive. Therefore cultivator should take production in this stage for maximizing the potential returns.

Irrational stages of production:
These are stage I and III. If production is taken in stage III it will result in loss, because MP and EP are negative and TP also decreases continuously.
In case of stage I, though TP, MP, AP. EP all are indicating increasing trend, it is irrational stage of production. If production is ceased in this stage, cultivator will not in loss but hen will loose, the potential possible returns. This is opposite to rauona1ity, hence stage is irrational.

Current Category » Economics of Natural Resources & Farm Management