Diminishing Marginal Productivity – Definition

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Diminishing Marginal Productivity Definition

The Law of Diminishing Marginal Product is an economics concept. It says that, at early stages of production, if we increase 1 production variable and the rest of the things remain the same, the product total production may increase. If, however, we continue to increase the input of that production variable, it will produce lesser returns (on average) per production variable.

In simple words, an increase in the quantity of 1 production variable will increase the output up to a certain point. After that point, it will give less gain for each unit added. The return on investment goes down.

A Little More on What is Diminishing Marginal Productivity

The Law of Diminishing Marginal Productivity applies to all types of businesses, including service providers, manufacturing concerns, and software houses. This phenomenon shows that despite having the resources to afford maximum machinery or labor, it will not result in greater productivity after a certain point. The reason is that it becomes less efficient and then, inefficient. To be aware of the cost efficiency, a producer should be able to understand at what point, the Diminishing Marginal Productivity begins to have an adverse effect on business.

Examples of Diminishing Marginal Utility

  • If a child eats a candy, it tastes sweet to him. When he eats 2nd candy, the satisfaction will become less than the 1st one. On 3rd candy, satisfaction will decrease more.
  • When a person holds his breath into the water, he feels pleasant when he comes out for air and takes his first breath. The 2nd breath will give satisfaction but not like the 1st one. Similarly, his satisfaction will further decrease as he takes more breaths afterward.

As you can see in these simple examples, we use more input units, with other certain fixed inputs. Initially, it may give more output in a fast turnaround. But gradually, it will produce less output at a diminishing rate. That’s why business owners, who want to expand their production, should apply The Law of Diminishing Marginal Productivity (DMP) before increasing any input to production (e.g., labor, raw material, etc.)

Suppose, there is a factory producing widgets. It uses electricity in the same amount to generate 0 to 100 widgets, but overworking reduces the efficiency of the machinery. It will also increase the electricity consumption exponentially at the point when production is one hundred and one widgets. The marginal productivity increases, when the output reaches one hundred widgets. This is because the company can produce higher volumes and sell without any additional expense of production. However, after exceeding the production of one hundred marks. Production cost begins to increase more rapidly as compared to the output volume. Ultimately, the exponential increase in the cost of electricity subsumes profit of every widget.

In order to keep making profits, the company needs to explore more options, such as lessen the volume of output, buy new machinery consuming less power, etc.

The marginal productivity can be calculated with the help of a formula.

MP =  changes in the total number of produced units  / changes in the input of a single variable.

For instance, suppose a production line has made a hundred toy cars in one hour. The company adds a new machine to the production line. Now, it will make five hundred toy cars within one hour. The change in the total number of produced units is four hundred. This is basically the difference in five hundred toys made by the production line now vs hundred toys it made earlier. It was done with the help of one more machine. Hence, the marginal product is 400/1 or 400/400.

Likewise, a hotel makes fifteen pizzas with four chefs. If the manager adds 2 more chefs, the hotel will be able to make thirty pizzas, now. The marginal product becomes 7.5 or fifteen extra pizzas divided by 2 extra workers hired.

References for Diminishing Marginal Productivity Definition

Academic Research on the Law of Diminishing Marginal Productivity

Why doesn’t capital flow from rich to poor countries?, Lucas, R. E. (1990). The American Economic Review, 80(2), 92-96. This paper is a thorough analysis of capital flow from developed to underdeveloped countries. The author elaborates the reason for such capital flow. The Law of Diminishing Marginal Productivity in the Model of Pure Discounted Income of Innovations, Minakov, V. F., Lobanov, O. S., Minakova, T. E., Makarchuk, T. A., & Kostin, V. N. (2017). International Journal of Economic Research, 14(14), 435-441. This research is based on the Law of DMP (Diminishing Marginal Productivity) in contrast with the PDII model, i.e. Pure Discounted Income of Innovations.

Restless Bandit Marginal Productivity Indices, Diminishing Returns, and Optimal Control of Make-to-Order/Make-to-Stock M/G/1 Queues, Niño-Mora, J. (2006). Mathematics of Operations Research, 31(1), 50-84. This study takes into account the convex optimization framework and economic solutions. This is to solve the issues of dynamic allocation of strive to a semi-Markov project and discrete state binary action with the help of index policies. Main research areas are; (1) the idea of a restless bandit’s MPI (Marginal Productivity Index). (2) Features of restless bandits which are indexable and satisfy DMP. (3) enough indexability cases using laws of Partial Conservation. (4) Features of MPI being a rate of marginal productivity which is optimal. (5) Applying for semi Markov bandits (6) Indexability analysis of PCL and MPI to control optimal service under the criteria of average and discounted bias.

Production and distribution in the short run, Stigler, G. (1939). Journal of Political Economy, 47(3), 305-327. This paper explains the short run production process as well as the temporary distribution process.

Prices of factors and good in general equilibrium, Samuelson, P. A. (1953). The Review of Economic Studies, 21(1), 1-20. This paper evaluates the prices of goods and factors in the state of general equilibrium.

Intensification revisited, Brookfield, H. C. (1984). Pacific viewpoint, 25(1), 15-44. There is a great difference between innovation and intensification. Innovation has always been more considerable in economic theories. The author evaluates the social theory in the context of the Pacific. The statistical evidence for the relation between new practices and surplus appropriation by elite class is inconclusive. The author provides an instance of the sugar industry and suggests that by adding extra labour inputs the intensification can turn into innovation. This study is based on historical proofs more than supposition.

Are there laws of production?, Douglas, P. H. (1948). The American Economic Review, 38(1), i-41. In this paper, the author reviews the American economy and makes a detailed analysis of whether the production laws are there or not.

An economic approach to the optimum utilization of fishery resources, Gordon, H. S. (1953). Journal of the Fisheries Board of Canada, 10(7), 442-457. This paper is about the economic method in which the optimal use of fishery resources is ascertained.

Dynamic priority allocation via restless bandit marginal productivity indices, Niño-Mora, J. (2007). Top, 15(2), 161-198. This research is based on a survey on the algorithmic as well as the theoretical perspective of RBI (Restless Bandit Indexation). The author explains how to apply it for problem-solving and allocating priority to various stochastic projects. The ideas have been taken from economics, linear programming and MOO (Multi-Objective Optimization). The issue was raised in Whittle seminal research. He uses a unified index for RB (Restless Bandits). Such type of indices can perform optimally rather outperform the benchmark plans.

When more is too much: Operationalizing technology overload and exploring its impact on knowledge worker productivity, Karr-Wisniewski, P., & Lu, Y. (2010). Computers in Human Behavior, 26(5), 1061-1072. The employees of an organisation tend to use Information Technology more at their workplace. But sometimes, technology overload generates productivity losses. The author presents 3 main factors that can affect productivity,i.e. (1) Information Overload (2) Communication Overload (3) Overload of System Features. So, the findings of this research are; (1) develop and test the measurement in prior to technology overload (2) validate the tool (3) examine the relationship in the use of IT and productivity of knowledge work.

Minimizing the total weighted flow time in a single machine with controllable processing times, Shabtay, D., & Kaspi, M. (2004). Computers & Operations Research, 31(13), 2279-2289. A single machine can create scheduling issue with the time criterion of least weighted flow. This problem is further extended to the allocation of a limited resource, which is not renewable. This is done using the sequence of an arbitrary job. The authors suggest algorithms of polynomial time to solve minor and medium problems while the heuristic algorithms are efficient for large problems.

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