PRACTICAL 1: LAW OF DIMINISHING RETURNS IN AGRICULTURE

(Factor – Product Relationship OR Input – Output Relationship)

The law of diminishing returns is a basic natural law affecting many phases of management
of a farm business. The factor-product relationship or the amount of resources that should be
used (optimum input) and consequently the amount of product that should be produced
(optimum output) is directly related to the operation of law of diminishing returns.

This law derives its name from the fact that as successive units of variable resource are used
in combination with a collection of fixed resources, the resulting addition to the total product
will become successively smaller.

The objective of factor-product relationship is to determine the optimum quantity of the

variable input that will be used in combination with fixed inputs in order to produce optimal
level of output. Further questions such as, how much fertilizer to be applied per acre? how
much irrigation to be given? and so on are all within the scope of factor – product
relationship.
There can be three types of input-output relationships in producing a commodity where one
input is varied and the quantities of other inputs are fixed. The nature of relationships
between a single input and a single output can either be of the one or a combination of types
given below:
i) Constant Marginal Rate of Returns or Law of Constant Returns.
ii) Increasing Marginal Rate of Returns or Law of Increasing Returns.
iii) Decreasing Marginal Rate of Returns or Law of Decreasing Returns.

A. LAWS OF RETURNS

Let us consider the simplest case where one product is produced by varying the level of only
one factor of production at a time.

i) Law of Constant Returns: The level of output increases by an equal amount for each
additional units of the variable input i.e., the relationship between the input and the output is
linear. Thus, graphically, the law of the law of constant returns can be depicted by a straight-
line production function. The production functionhas the same slope throughout its entire
range as shown in the figure 1.

Fig. 1: Law of Constant Returns

Mathematically, it can be

Where ΔYi /ΔXi is the marginal product due to the use of the ith unit of variable input X ( i =
1, 2,…,n ).

The Law of constant marginal returns (productivity) is said to operate when each marginal
unit of variable input adds equal quantity of output to the total output. It is applicable over
limited range, e.g. one tractor (plus driver) will almost give same output, other things
remaining constant

The constant returns may be explained with the data given

Nitrogen (X) Total Product Marginal

in kg of maize (Y) Product(∆Y/∆X)
in kg
40 1405 -
45 1480 15
50 1555 15
55 1630 15
60 1705 15
65 1780 15

The above table shows that every addition of 5 Kg of nitrogen (ΔXi) causes exactly the same
increase in yield of maize per ha (ΔYi) during the process of production.

ii) Law of Increasing Returns: The addition of each successive unit of variable factor to the
fixed factors in the production process adds more to the total output than the previous unit i.e.
each successive unit of variable factor adds more and more to the total output.

Such an input-output relationship is generally encountered at a relatively lower level of input

use. The resulting production function is a non-linear curve of the type shown in the figure 2
and is convex to the input axis.

Fig. 2: Law of Increasing Returns

Mathematically, the law can be written as

This is illustrated in the following table.

Nitrogen (X) Total Product Marginal

in kg of maize (Y) Product(∆Y/∆X)
in kg
10 1000 -
15 1025 5
20 1075 10
25 1150 15
30 1250 20
35 1375 25
Thus, in terms of marginal productivity of the variable factor of production, the law of
increasing return signifies an increasing marginal product with an addition of every
successive unit of the variable resource. The example given in the table indicates the response of
maize to increasing level of nitrogen application at a very low level of the input-use. It may be
observed that as the input is increased from 10 to 35 kg per hectare, an additional dose of 5 kg at each
step, the yield increases by 5, 10, 15, 20 and 25 kg per hectare. Thus, every successive dose of 5
Kg of nitrogen results in more output of maize signifying the operation of the law of increasing
returns.

iii) Law of Decreasing Returns: When one variable input used for the production of a certain
commodity is increased relative to other inputs, the physical output obtained from each added unit
of the variable input(s), tends to decline after a certain point has been reached. Thus, each
additional unit of the variable input results in less and less addition to the total output as shown in
the following figure

Fig. 3: Law of Decreasing Returns

Mathematically the relationship can be explained by

The marginal productivity of the variable input X goes on declining with the increasing level
of total output as a result of more intensified use of the variable factor. This type of return can
be shown geometrically by a non-linear curve of the type shown in the above figure 3. Such a
curve would be concave to the input axis and convex upwards.

This is illustrated in the following table.

Nitrogen (X) Total Product Marginal

in kg of maize (Y) Product(∆Y/∆X)
in kg
70 1830 -
75 1880 10
80 1920 8
85 1950 6
90 1970 4
95 1980 2
It could be noted that every additional unit of variable input of five kg nitrogen, adds less and
less output i.e from 10 kg to 8 kg, 8 kg to 6 kg , 6 kg to 4 kg and 4 kg to 2 kg. This clearly
indicates the law of diminishing returns.

Law of Diminishing Marginal Returns states that, if increasing amounts of one input are
added to land, keeping all other factors/ inputs constant, the amount of output added per unit
of variable input may increase initially for some time but will start decreasing later.

Figure: Classical production function showing different stages of production

Production concepts used in explaining LDR
Total Physical Product (TPP): It is the quantity of output produced at a particular level of
variable input use.
Average Physical Product (APP): It is the total product produced per unit of variable input
Total Product (Y)
AP = ________________
Quantity of Input (X)
Marginal Product or Marginal Physical Product (MPP): It is the added output due to
added input keeping all other factors constant (ceteris paribus). Marginal product of an input
is the contribution of specific dose of input to the output.
Added Output (∆Y)
MP = ________________
Added Input (∆X)
Inflection Point: The point where the MP is maximum is called inflection point. It is the
point where the contribution of an input is maximum or highest.

Economic Optimum Point: The point where VMP = MFC (Value of Marginal Product is
equal to Marginal Factor Cost) gives the economic optimum dose of input.
i.e. MP x Py = Px
Agronomic optimum point of input = Dose of input at which TP is maximum and MP = 0

Three stages of production

The classical production function can be divided into three regions or stages, each being
important from the standpoint of efficient resources use.
Stage-I occurs when marginal physical product (MPP) > average physical product (APP).
APP is increasing throughout this stage, indicating that the average rate at which X is
transformed into Y, increases until APP reaches its maximum at the end of Stage-I.

Stage-II occurs when MPP is decreasing and is less than APP but greater than zero. The
physical efficiency of the variable input reaches a peak at the beginning of Stage–II. On the
other hand physical efficiency of fixed input is greatest at the end of Stage-II. This is because
the number of fixed input is constant and therefore the output/ unit of fixed input must be the
largest when the total output from the production process is maximum.

Stage-III occurs when MPP is negative. Stage III occurs when excessive quantities of
variable input are combined with the fixed input, so much, that total physical product (TPP)
begins to decrease.

Economic recommendations & production function analysis: Production function

knowledge and the input and output prices information can be used to know the most
profitable input and output levels. However, even when price information is not available,
some recommendations about the input use can be made from the production function itself.
1. If the product has any value at all, input use once begun, should be continued until
Stage–II is reached. That is because physical efficiency of variable resources,
measured by APP, increases throughout stage –I.
 2. Even if input is free, it will not be used in stage III. Maximum output occurs when
Stage II closes. It is of no use applying variable input when TPP starts coming down.

3. Stage II defines the area of economic relevance. Variable input use must be
somewhere in stage-II, but exact input amount can be determined when choice
indicators (input & output prices) are known.

A. Relationship between TPP & MPP

1. Since MPP is a measure of rate of change, therefore
(i) when TPP is increasing, MPP will be +ve,
(ii) when TPP decreases, MPP will be –ve.
2. So long MPP moves upward, TPP increases at an increasing rate.
3. When MPP remains constant, TPP increases at a constant rate.
4. When MPP starts declining, TPP increases at a decreasing rate.
5. When MPP is zero, TPP will be at maximum.

B. Relationship between MPP & APP

1. When MPP is increasing, APP is also increasing. So long as MPP is above APP, the APP
keeps increasing.
2. When MPP curve goes below APP curve, APP starts declining, that is, when AP is
decreasing the MP is always less than APP.
3. When MP = AP, AP will be at maximum. Here MP curve must intersect AP curve from
above at its highest point.

So when MP > AP, AP↑

MP < AP, AP↓
MP = AP, AP is at maximum.

Elasticity of production: The elasticity of production is a concept that measures the degree
of responsiveness between output and input. It is independent of the units of measurement.

The point of diminishing returns can be defined to occur when MPP = APP that is Ep= 1
(lower boundary of stage II) & this is the minimum amount of variable input that will be used
& it occurs when the efficiency of variable input is at its maximum. At the other end, MPP is
zero, therefore Ep = 0. Thus the relevant production zone is when O ≤ Ep ≤ 1.
Exercise 1: The following table indicates a hypothetical production process, where input X is
the variable input used and price of variable input is Rs. 40/ unit and price of output is Rs. 20/
unit. Find out the optimum combination.
Labour (X) TP (Y) in AP (Y/X) MP EP MFC (Rs) VMP (Rs)
Quintal (∆Y/∆X) (Px) (MP x Py)
0 0 0.00 - - - -
1 3 3.00 3 1.00 40 60
2 8 4.00 5 1.25 40 100
3 12 4.00 4 1.00 40 80
4 15 3.75 3 0.80 40 60
5 17 3.40 2 0.59 40 40
6 17 2.83 0 0.00 40 0
7 16 2.29 -1 -0.44 40 -20
8 13 1.62 -3 -1.85 40 -60

Exercise 2: The following table indicates the response of tomato (Y) to Nitrogenous fertilizer
(X) use per hectare. The Price of nitrogen (Px) is Rs. 9 per kg and price of tomato (Py) is Rs.
4.50 per kg. Find out the optimum combination.

Nitrogen
TP (Y) AP MP MFC VMP (Rs)
(X) in EP
in kg (Y/X) (∆Y/∆X) (Rs) Px (MP x Py)
kg.
0 0 0 0 - 0 0
5 1000 200.00 200 1.0 45 900
10 2500 250.00 300 1.2 45 1350
15 4500 300.00 400 1.3 45 1800
20 7000 350.00 500 1.4 45 2250
25 9300 372.00 460 1.2 45 2070
30 11300 376.67 400 1.1 45 1800
35 12600 360.00 260 0.7 45 1170
40 13500 337.50 180 0.5 45 810
45 14000 311.11 100 0.3 45 450
50 14200 284.00 40 0.1 45 180
55 14250 259.09 10 0.0 45 45
60 14260 237.67 2 0.0 45 9
65 14265 219.46 1 0.0 45 5
70 14100 201.43 -33 -0.2 45 -149
 PRACTICAL 1: LAW OF DIMINISHING RETURNS IN AGRICULTURE
(Factor – Product Relationship OR Input – Output Relationship)
The law of diminishing returns is a basic natural law affecting many phases of management
of a farm business. The factor-product relationship or the amount of resources that should be
used (optimum input) and consequently the amount of product that should be produced
(optimum output) is directly related to the operation of law of diminishing returns.
This law derives its name from the fact that as successive units of variable resource are used
in combination with a collection of fixed resources, the resulting addition to the total product
will become successively smaller.

Exercise 1: The following table indicates a hypothetical production process, where input X is
the variable input used and price of variable input is Rs. 40/ unit and price of output is Rs. 20/
unit. Find out the optimum combination.
Labour (X) TP (Y) in AP (Y/X) MP EP MFC (Rs) VMP (Rs)
Quintal (∆Y/∆X) (Px) (MP x Py)
0 0
1 3
2 8
3 12
4 15
5 17
6 17
7 16
8 13

Exercise 2: The following table indicates the response of tomato (Y) to Nitrogenous fertilizer
(X) use per hectare. The Price of nitrogen (Px) is Rs. 9 per kg and price of tomato (Py) is Rs.
4.50 per kg. Find out the optimum combination.
Nitrogen TP (Y) in AP (Y/X) MP EP MFC (Rs) VMP (Rs)
(X) in kg. kg (∆Y/∆X) (Px) (MP x Py)
0 0
5 1000
10 2500
15 4500
20 7000
25 9300
30 11300
35 12600
40 13500
45 14000
50 14200
55 14250
60 14260
65 14265
70 14100