The Law of Diminishing Marginal Product
It has been discussed earlier that
in the short run one of the factors of production is variable and the other(s)
constant. The marginal product of the variable factor will decrease eventually
as more and more of quantities of this factor will be combined with the other
constant factor(s). The expansion of output with one factor (at least) constant
is described as the Law of Diminishing Marginal Product of the variable factor,
which is often referred to as the law of variable proportions.
If the law of diminishing marginal
product operates the isoquants will be convex to the origin. A convex isoquant
means that the marginal rate of Technical substitution (MRTS) between L and K
decreases as L is substituted for K. But the MRTS is equal to the ratio of the
marginal productivities of the two factors i.e. MRTS = fL/fK.
In figure, as we move from the point
P to the point Q along the isoquant Q0, we employ RQ units more of L
and PR units less of K. By moving from P to Q, we increase the labor input by
RQ and reduce the capital by PR. That is, we substitute RQ labor for PR. The
rate of this substitution is called Marginal Rate of Technical Substitution
(MRTSL,K ). For the submission, MRTS = = .
What is the MRTSL,K for a movement from Q to S on the
isoquant? Here, the increase in labor input is TS, which is equal to RQ. The
decrease in capital input in QT. Therefore, MRTSL,K = . By comparing MRTSL,K at these two points, it is obvious that
MRTSL,K at Q is less than at
P. Though RQ = TS, QT < PR. That is, for the same increase in labor input
the reduction in capital will be less as we move down the Isoquant. This is
because of law of diminishing marginal product. As we shall see later, MRTSL,K
at any point on the isoquant is equal to the slope of a tangent at that
point. The slope is nothing but the ratio of MP1 and MPk. Therefore,
the marginal productivity of L decreases and that of K increases as we move
along the isoquant from P to Q., In other words, (f1/fk at
Q). Therefore, we can say that MRTSL,K at P > MRTSL,K at Q, i.e. MRTS
between L and K decreases as we move from P to Q. Thus it can be said that MRTS
between factors follows the diminishing marginal productivities of both the
factors of production. Hence the convexity of the isoquant follows directly
from the law of diminishing marginal productivity.
As we had discussed in the analysis
of indifference curves that two indifferences cannot intersect each other, in
the same way it can be proved in the case of isoquants that two isoquants
cannot intersects each other.
A set of curves form a family of
isoquants as shown in figure. All the inputs combinations, which lie on an
isoquant, will result in an output indicated for that curve. The further an
isoquant lies from the origin, the greater the output level which it
represents: Therefore, Q3 > Q2 >Q1.
The partial derivative of production
function ¶Q / ¶L is the
marginal productivity of labor (MP1). It is the extra amount of
output that can be obtained by employing one additional unit of L, K remaining
the same. Similarly, ¶Q / ¶K is the
marginal productivity of the capital (MPK). We assume that MP1
or f1 > 0 and MPK or fK>0.
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