In its most simplified form, diminishing marginal productivity is typically identified when a single input variable presents a decrease in input cost. A decrease in the labor costs involved with manufacturing a car, for example, would lead to marginal improvements in profitability per car.
What is the law of diminishing marginal returns?
Inputs can include things like labor and raw materials. The law of diminishing marginal returns states that when an advantage is gained in a factor of production, the marginal productivity will typically diminish as production increases. This means that the cost advantage usually diminishes for each additional unit of output produced.
What is the law of reducing marginal productivity?
In other words, after a certain point, the additional output produced by each additional unit of the variable input will be smaller than the output produced by the previous unit. To understand the Law of Diminishing Marginal Productivity, let’s consider a factory that produces cars.
