Question

State and explain the law of diminishing returns with the help of an illustration.

Answer 1

When more and more units of a variable factor (like labour) are used on a fixed factor (like machines or land), the marginal product of the variable factor will finally go down. This is called the law of diminishing returns.

(Production of Ballpoint Pens)
Number of Workers (L)	Total Product (TP) (No. of Pens)	Average Product (AP) (No. of Pens)	Marginal Product (MP) (No. of Pens)
(1)	(2)	(3)	(4)
0	-	-	-
1	100	100	100	Stage 1
2	220	110	120
3	360	120	140
4	520	130	160
5	650	130	130
6	750	125	100	Stage 2
7	840	120	90
8	880	110	40
9	880	97.7	0
10	830	83	−50	Stage 3
11	770	77	−60

This table shows the production of ballpoint pens using different numbers of workers (labour). Capital (like machines) is fixed. 

1. Stage 1: Increasing Returns (Up to 5 workers)
   • Total Product (TP) increases rapidly:
     Example: TP rises from 100 to 650 (1st to 5th worker)
   • Marginal Product (MP) also increases:
     From 100 to 160 pens (1st to 4th worker).
   • Why? Fixed factor is underutilized, so adding more labour increases output faster.
2. Stage 2: Diminishing Returns (6th to 9th worker)
   • TP increases but at a diminishing rate:
     From 650 to 880 pens.
   • MP decreases:
     From 100 to 0.
   • This is the Law of Diminishing Returns in action.
     Each extra worker contributes less additional output than the previous one.
3. Stage 3: Negative Returns (10th worker onwards)
   • TP falls from 880 to 770 pens.
   • MP becomes negative:
     −50 for the 10th worker and −60 for the 11th.
   • Adding more labour reduces total output, as overcrowding reduces efficiency.

It's easy to see how the law of diminishing returns works in Stage 2, where adding more workers leads to less and less output, even though the total output still goes up.