Question

(micro economics)

Explain why marginal product first increases and then decreases, i.e., explain the law of diminishing product.

Answer 1

The economic law of decreasing marginal productivity is an economic principle that managers must take into account in managing productivity. Generally speaking, it states that any advantage gained from a slight improvement on the equation's input side will only progress to one point. After this level, there will be no further feedback to increase productivity. As an example, when additional workers are hired, a factory may produce more widgets. But at some point, more people on the line of production won't produce more widgets, and may actually slow down the process as workers don't have the room to work.

Marginal productivity refers to the extra output resulting from the benefits of inputs from production. Inputs provide raw materials and labor. The law of increasing marginal returns states that the marginal productivity will usually decrease as production increases when an advantage is gained in a factor of production. This means that for each additional unit of input produced, the cost advantage usually decreases.

The Law of Diminishing Marginal Product is the economic concept showing that increasing one variable of output while holding everything else the same would initially increase overall production but produce less returns the more the variable is increased. In other words, it won't be productive past a certain point to increase one production factor while keeping everything else the same. This affects all companies that use inputs to create an output: think software companies, manufacturing companies, and service companies. This means a company can't just use the maximum labor or machinery it can afford because it won't be efficient. A supplier needs to know when DMP begins to impact their business in order to be as cost-effective as possible.