Law of Diminishing Marginal Productivity
The law of diminishing marginal productivity is an economic principle, which operates on the argument that while increasing the amount of a particular fixed input, and keeping others at a similar level may grow the amount of outputs initially, additional increment in that input may not have much impacts at the end. In fact, the overall output gradually steadies and finally assumes a downward trend. For managers of manufacturing companies looking towards expanding their production levels, the rule should always be taken into account.
According to this law, increasing a certain input, while maintaining others on the same plane may develop from having a minimal effect to no or negative impact on the overall output of the company. As a result of this, the company will be headed for failure despite the increase in the given input. This principle offers a better explanation on why increasing productions is not always the most ideal way of maximizing profits.
A Breakdown of the Law of Diminishing Marginal Productivity
To most people, describing the law of diminishing marginal productivity may seem challenging. However, the following analysis will help you to understand all the elements of this economic principle, and also how it is applied in various areas.
This law argues that there are other options that business managers can still pursue in order to enhance profitability, other than simply increasing a particular fixed input. In fact, it reveals that instead of continuously increasing a given input, it would be advisable to stop at some point, and try a different input. Alternatively, the managers can also produce an additional or different product in order to attract more profits.
An example of an area where this principle can be applied is by a pizza restaurant looking towards increasing its profitability.
One of the steps that the restaurant can take is increasing the amount of cheese as the input, which is used in making the pizza so the product can be delicious and attract more customers. However, at some point the pizza gets to an optimal level of cheese. It is important that the amount of cheese is balanced with the thickness of the crust, amount of sauce and other toppings used in pizza.
If the restaurant continues to make pizzas with more cheese beyond the level required by many customers, the sales will start to drop since many consumers will not find the products appealing anymore.
In order to win back the customers who are already shifting to other pizza restaurants and also acquire more, the restaurant has to start by optimizing the amount of cheese used on its pizzas. Besides, it may also consider increasing an alternative input, like pepperoni or sausage, among others. On the other hand, the restaurant could also even go a step further and include other products that are usually bought together with pizza.
Other areas where the Law of Diminishing Marginal Productivity is applied
There are other areas where the law of diminishing marginal productivity can also be applied. One is by a farmer who deals in fresh farm produce. Based on the piece or acreage of the land, the farmer always knows the amount of labor force required for maximum yields. In case he or she acquires more workers, the combination of both factors of land and labor would not be efficient since the proportional increase in the overall output would be lower compared to the number of additional workforce. This implies the volume of output per worker would decline.
Ignoring the likelihood of scientific and technical developments that would enhance the means of production, early economists used this rule in predicting that as population grew across the globe, output per individual would decline, to an extent where the level of misery would scare the masses from continuous population increase.
In poor economies, where the production techniques have not changed over a long period of time, the prediction by early economists is clearly brought out. Unlike in stable economies, developments in technologies and production processes have gone several miles ahead in offsetting this element and stabilizing the living standards of many people despite the rapid population increase that they are facing too.
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