Chapter 6 defines diminishing returns to labor as a decline in the marginal product of labor when more workers are added to a fixed amount of land or capital. More generally, diminishing returns occur any time one factor of production increases while some other factor is fixed. Diminishing returns applies in so many situations—from the use of fertilizer in the production of potatoes to the use of labor in the production of French fries that economists sometimes refer to it as the law of diminishing returns. The following discussion shows how experiments provide evidence on diminishing returns.
The table below shows data on potato production obtained from experiments in Maine. The variable input to the production of potatoes is fertilizer; land, capital, labor, and other inputs to production are fixed in the experiments.
Potato Production (hundreds of bushels per acre) |
Fertilizer Input (hundreds of pounds) |
Variable Costs (dollars at $1 per pound) |
Marginal Cost (dollars) |
1 |
5 |
500 |
-- |
2 |
15 |
1,500 |
1,000 |
3 |
30 |
3,000 |
1,500 |
The first column of the table shows the number of bushels of potatoes that can be obtained from an acre; observe how potato production increases as more fertilizer is used. Observe the decreasing marginal product of fertilizer: Additional pounds of fertilizer result in smaller increases in potato production. A plot of this relationship is shown in the graph.
What does this data imply about the marginal cost of potatoes? Assuming that fertilizer costs $1 per pound, the variable costs of potato production are shown in the third column. Variable costs are given by the price of fertilizer times the amount of fertilizer used in production.
Marginal cost can be computed from the change in variable costs; (fixed costs, which do not change and therefore do not matter in the calculation of marginal cost, are not shown). With three observations on variable cost, we can compute two values for the marginal cost of potato production as shown in the table. Observe how marginal cost increases with the amount of potato production.
