Marginal Revenue Product
The variations in output that result from applying more or less of a
variable factor to a given quantity of a fixed factor are the subject of a
famous economic hypothesis, referred to as the law of diminishing
returns
The law of diminishing returns states that if increasing amounts of a variable factor are applied
to a given quantity of a fixed factor (holding the level of technology constant), eventually a
situation will be reached in which the marginal product of the variable factor declines.Notice in Figure 7-1 that the marginal product curve rises at first and
then begins to fall with each successive increase in the quantity of labour.
The common sense explanation of the law of diminishing returns is that
in order to increase output in the short run, more and more of the
variable factor is combined with a given amount of the fixed factor. As a
result, each successive unit of the variable factor has less and less of the
fixed factor to work with. When the fixed factor is capital and the variable
factor is labour, each worker (or worker hour) gets a declining amount of
capital to assist it in producing more output. It is not surprising, therefore,
that sooner or later, equal increases in work effort eventually begin to add
less and less to total output.
To illustrate the concept, consider the number of workers in our
skateboard manufacturing firm, which has only a given amount of factory