Law of Diminishing Marginal Productivity
Law of diminishing marginal productivity is also known as variable factor proportions. It is an economics principle that states while one input is been increased and others kept at a similar level, the initial output is increased.
The effect of further increase of the initial input will have limited effect and in the end, negative or no effect on the output. This law also explains why increase in production is not necessarily the best strategy for increasing profitability.
T.R Malthus, David Ricardo and Edward West, are the notable economists who introduced this concept for the first time in 1815. They use the law for applications of a fixed plot of land. The first time the theory was applied to work though was in 1889 by John Bates Clark.
Law of diminishing marginal productivity shows instead of proceeding with increase of a similar input, it would be better to halt at a certain level and instead, increase a new or different input or produce a different or additional service or product for the purposes of maximizing on profits.
There are several examples that further explain the law of diminishing marginal productivity.
- If a shop has one person who works there and another person is employed, the total income will increase and so will production because there will be labor division one. The income will keep rising at an increasing rate until there are five workers who are fully utilized. If the shop employs one more person, the total income will also increase but there might be a drop in the average income which is income per person as a result of an additional unit of labor. In the same manner, it can be said that the addition of a 6th worker is not more than that of the earlier unit.
- Another example is that of a pizza restaurant that is interested in increasing profitability. By increasing the cheese (input) into each pizza, the restaurant can create a product that is more delicious and consequently, it can sell an increased number of pizzas. However, at some point, the pizza will reach optimal cheese level. When this happens it means the cheese should be balanced with thickness of the crust, other toppings and amount of sauce if there is any. However, if the restaurant decides to continue adding more cheese to that pizza that goes beyond the optimal level, it means that sales will also decline simply because consumers are likely not to enjoy pizza that are filled with nothing else but cheese. Therefore, if the restaurant is to increase profitability, after optimizing on the cheese, it should also increase a different input like sausage, pepperoni or another product like chocolate gelato.
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