Q.
a) With the aid of diagram, discuss the relationship between factors of production and the law of diminishing returns. (15 marks)
b) Using appropriate examples, explain the meaning of economics of large scale production. (5 marks)
(20 marks, 2014 Q3)
A.
a) The law of diminishing return or marginal return is explained here.
Factors of production are variables that could be controlled in a production process to alter the output, e.g. Raw materials, workforce, etc.
In the short run, output may be varied by varying the quantity (quantities) of the variable factor (s), while keeping the quantity (quantities) of other factors constant. The behaviour of output in such situation actually falls into three distinct stages.
In Fig. 8.2, we have graphically illustrated the production function with one factor variable (for the sake of convenience), while all other factors are held constant. Quantity of the variable factor is shown on the X-axis and total product, average product and marginal product are measured along the Y-axis.
The variations in the total, average and marginal product by varying the quantity of variable factor are shown in this figure. Here, total product (TP) goes on rising to a point and after that it starts falling. Average and marginal product curves also rise and then decline. However, marginal product curve falls earlier than the average product curve. Three stages of the law are explained here.
Stage of Diminishing Returns:
In stage II, the total product continues to increase at a diminishing rate, until it reaches the maximum point ‘F’ where the second stage ends. In this stage, both the average product and marginal product of the variable factor are diminishing (but not negative), the latter falling at faster rate.
That is why; this stage is known as the stage of diminishing returns. With falling average product curve, efficiency of variable factor decreases and that of fixed factor continues to rise. The average product of the variable factor exceeds the marginal product of the factor throughout this stage.
At the end of second stage, i.e., at point ‘B’, marginal product of the variable factor is zero (corresponding to the highest point ‘F’ of the TP curve). This stage is very crucial. It is the stage of operation. A rational producer will always seek to produce in this stage, where both the average and marginal product are falling.
In the words of Joan Robinson, “The Law of Diminishing Returns as it is usually formulated, states that with a fixed amount of any factor of production, successive increases in the amounts of other factors will, after a point, yield diminishing increments of output.
Ref:
Earlier post on Stages of Production here.