The law of diminishing marginal productivity. The law of diminishing marginal productivity of factors

The law of diminishing marginal productivity is one of the generally accepted economic statements, according to which the use of one new production factor leads to a decrease in output over time. Most often, this factor is additional, that is, not mandatory in a particular industry. It can be applied intentionally, directly in order to reduce the number of products, or due to a combination of some circumstances.

What is the theory of decrease in productivity

As a rule, the law of diminishing marginal productivity plays a key role in the theoretical part of production. Often it is compared with the proposal of a diminishing marginal utility, which takes place in consumer theory. The comparison is that the above sentence tells us how much each individual buyer and consumer market in principle maximizes the overall utility of the goods produced, and also determines the nature of the demand for pricing. The law of diminishing marginal productivity acts precisely on the steps that the manufacturer takes to maximize profits and the dependence of the exposed price on demand precisely on its part. And for all these complex economic aspects and issues to become clearer and more understandable for you, we will consider them in more detail and on specific examples.

Pitfalls in the economy

First, let's define the meaning of the formulation of this statement. The law of diminishing marginal productivity is by no means a reduction in the quantity of a manufactured product in an industry during all ages, as it appears in the pages of history textbooks. Its essence lies in the fact that it works only in the case of an unchanged mode of production, if something is intentionally "inscribed" into an activity that inhibits everyone and everything. Of course, this law does not work in any way, if it is a matter of changing the characteristics of productivity, the introduction of new technologies, etc., and so on. In that case, you will say, it turns out that the volumes of production in a small enterprise are greater than on its larger analogue, and this is the crux of the whole question?

Carefully reading the words ...

In this case, we are talking about the fact that productivity is reduced due to variable costs (material or labor), which, respectively, at a larger enterprise are more large-scale. The law of diminishing marginal productivity is triggered when this most marginal productivity of the variable factor reaches its maximum in terms of costs. That is why this formulation has nothing to do with increasing the production base in any industry, whatever it is characterized. In this issue, we only note that not always an increase in the volume of produced commodity units leads to an improvement in the state of the enterprise and the whole business as a whole. Everything depends on the nature of the activity, because each individual species has its own optimal growth limit for production. And if this borderline is exceeded, the efficiency of the enterprise, respectively, will begin to decline.

An example of this difficult theory

So, in order to understand how the law of decreasing marginal productivity of factors of production works, let us consider it in a clear example. Suppose, you are the manager of an enterprise. In the specially designated territory there is a production base where all the equipment necessary for the normal functioning of your company is located. And now it all depends on you: produce more or less goods. To do this, you need to hire a certain number of employees, make up an appropriate mode of the day, purchase the right amount of raw materials. The more employees you have, the denser you schedule, the more you will need the basics for the product you are releasing. Accordingly, the volume of production will increase. This is the basis of the law of diminishing marginal productivity factors that affect the quantity and quality of work.

How does this affect the selling price of the goods

We go further, and we take up the issue of price policy. Of course, the owner is a master, and he himself has the right to set the desired fee for his goods. However, to focus on the market indicators that have long been established by your competitors and predecessors in this field of activity, still worth it. The latter, in turn, tends to change constantly, and sometimes the temptation to sell a certain batch of goods, even if it is "unreleased", becomes great when the price reaches its maximum on all exchanges. In such cases, in order to sell as many trade items as possible, one option is chosen from two: an increase in the production base, that is, of raw materials and the area on which your equipment is located, or hiring more employees, working in several shifts and so Further. It is here that the law of diminishing marginal productivity of return comes into force, according to which each successive unit of the variable factor brings a smaller increment in total production than each previous one.

Features of the formula for the decrease in productivity

Many, having read all this, will think that this theory is nothing but a paradox. In fact, it occupies one of the fundamental positions in the economy, and it is based not on theoretical calculations, but on empirical ones. The law of diminishing labor productivity is a relative formula derived by long-term observations and analysis of activity in various spheres of production. Deep into the history of this term, we note that for the first time it was voiced by a French financial expert named Turgot, who - as a practice of his activity - considered the characteristics of the work of agriculture. So, for the first time, the "law of diminishing soil fertility" was derived in the 17th century. He said that the constant increase of labor applied to a certain section of the land leads to a decrease in the fertility of this site.

A bit of Turgot's economic theory

Based on the materials that Turgot described in his observations, the law of diminishing labor productivity can be formulated as follows: "The assumption that increased costs will further increase the volume of the product is always false." Initially, this theory had a purely agricultural background. Economists and analysts claimed that on an earthen plot, the parameters of which do not exceed 1 hectare, it is impossible to grow more and more crops to feed a lot of people. Even now, in many textbooks, in order to explain to students the law of diminishing marginal productivity of resources, it is the agricultural sector that is used as a clear and most understandable example.

How it works in agriculture

Let us now try to understand the depth of this question, which is based on a seemingly banal example. We take a certain piece of land, on which it is possible to grow more and more centners of wheat every year. Up to a certain point, each addition of additional seeds will bring an increase in production. But there is a turning point when the law of decreasing productivity of the variable factor comes into force, implying that additional labor costs, fertilizers and other details necessary for production start to exceed the previous level of income. If we continue to increase production volumes on the same plot of land, then the decline in past profits will gradually grow into a loss.

But what about the competitive factor?

If we assume that this economic theory does not have the right to exist in principle, we will get the following paradox. Let's say that growing more and more new spikelets of wheat in one piece of land will not be so expensive for a producer. It will be spent on each new unit of its products in the same way as on the previous one, while constantly increasing only the volumes of its goods. Consequently, it can produce such actions indefinitely, while the quality of its products will remain as high, and the owner will not have to purchase new territories for further development. Proceeding from this, we get that all the produced amount of wheat can be concentrated on a tiny area of soil. In this case, such an aspect of the economy as competition simply excludes itself.

Create a logical chain

Agree that this theory has no logical background, since everyone knows from time immemorial that every wheat that is present on the market differs in price, depending on the fertility of the soil on which it was grown. And now we come to the main thing - it is the law of diminishing returns to productivity that explains why someone cultivates and uses more fertile soil in agriculture, while others are satisfied with less quality and suitable soils. Otherwise, if every additional centner, kilogram, or even gram could be grown on the same fertile stretch of land, then no one would have the idea of processing lands that are less suitable for the agricultural industry.

Features of the former economic doctrines

It is important to know that in the 19th century economists still inscribed the above theory exclusively into the sphere of agriculture, and did not even try to take it beyond this framework. All this was explained by the fact that it was in this industry that such a law had the greatest amount of obvious evidence. These include a limited production zone (this is a land plot), a fairly low rate of all types of work (manual processing, wheat also grew naturally), in addition, the range of crops that can be grown was fairly stable. But given that scientific and technological progress has gradually embraced all areas of our life, this theory quickly spread to all other spheres of production.

Towards Modern Economic Dogmas

In the 20 th century, the law of diminishing productivity became final and irrevocable, universal and applicable for all types of activity. The costs that were used to increase the resource base could become larger, but without a territorial increase in further development, there simply could not be. The only thing that manufacturers could do without expanding their own boundaries of activity is to purchase more efficient equipment. All the rest - the increase in the number of employees, work shifts, etc. - inevitably led to an increase in production costs, and incomes grew with a much smaller percentage, relative to the previous indicator.