Law of Diminishing Marginal Returns

 

A problem of congestion emerges as your organization grows. Your dump trucks' passenger compartments become crowded and more time is wasted at the excavation site waiting to load trucks that arrived earlier. A second challenge emerges from coordinating increased work effort---ensuring that the left hand knows what the right hand is doing, limiting coffee breaks to 15 minutes, and so on. Table 1 and Figure 1 indicate that congestion and loss of coordination eventually become so severe that the seventeenth worker adds only one ton of material per day, the eighteenth's contribution is nil, and hiring the nineteenth worker actually yields a drop in output.

 

As more and more labor is employed, total output (Panel A) initially rises at an increasing rate because of gains from specialization. In this range, the marginal and average physical products of labor both grow (Panel B). As congestion begins to emerge, total output continues to grow, but at a falling rate. In this range, average physical product continues to climb, but marginal productivity diminishes. Once marginal physical product falls below average physical product, average physical product begins to fall. However, total output continues to rise until the marginal physical product is zero. This occurs when congestion or other problems are so severe that further labor inputs cause output to fall.

 

Table 1 Total Output and the Average and Marginal Physical Products of Labor (Sand and Gravel Operation)

(1) LABOR Workers per 8-hr. Shift      (L)	(2) OUTPUT Tons of Sand and Gravel Removed Daily           (q)	(3) APPL Average Physical Product of Labor            (q/L)	(4) MPPL Marginal Physical Product of Labor (Dq/DL)
0	0	0	0
1	10	10.00	10
2	22	11.00	12
3	36	12.00	14
4	52	13.00	16
5	70	14.00	18
6	86	14.33	16
7	100	14.28	14
8	112	14.00	12
9	122	13.55	10
10	130	13.00	8
11	137	12.45	7
12	143	11.92	6
13	148	11.38	5
14	152	10.85	4
15	155	10.33	3
16	157	9.81	2
17	158	9.29	1
18	158	8.78	0
19	157	8.26	-1

 

            The decline in extra output as extra workers are employed might seem a consequence of hiring better workers first and then hiring mediocre or inferior workers. This is unnecessary to explain diminishing marginal returns. In fact, we might assume that all workers were clones from a robot factory.  As more and more workers are added to a fixed amount of resources such as capital, land, and supervision, workers’ marginal physical products tend to diminish regardless of the qualities of the individual workers.

 

The law of diminishing marginal returns occurs when equal increases of variable resources are successively added to some fixed resource; marginal physical products eventually decline.

 

            The fixity of at least one resource in the short run makes diminishing marginal returns unavoidable: Not all resources can be varied proportionally, so capital and land per worker fall as more workers are hired, inevitably leading to diminishing additions of output as extra labor is hired. This basic economic law is without exception. Were it not for diminishing returns, enough food might be grown in a flower pot to feed the world.

 

            Table 1 and Figure 1 reflect the outputs produced if various numbers of workers put in 8-hour days. Gains from specialization enable each of the first five workers to add more than the preceding worker to total output, but the forces that compel marginal productivity to diminish overwhelm any gains from further specialization for the sixth and subsequent workers. While total output continues to increase, it increases at a declining rate, until the eighteenth worker adds nothing to total output.