Question

What is meant by “diminishing returns to a factor”?

Answer 1

The diminishing returns to a factor depict a particular phase under the law of variable proportion. Under this stage, the returns to a variable factor input or the marginal product is diminishing in nature, thereby giving the name ‘diminishing returns to a factor’.

This can be better understood with the help of the given diagram.

Here, the Diminishing Returns to a Factor is the stage that starts from point K and continues till point B on the TP curve. During this stage, the TP increases but at a decreasing rate and attains its maximum point at B, where it remains constant. On the other hand (in figure ii), the MP curve continues to fall and cuts AP from its maximum point Z, where MP equals AP. When TP attains its maximum point, corresponding to it, MP becomes zero. AP, in this stage initially rises, attains its maximum point at Z and thereafter starts falling.