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=Law of diminishing returns (Raw draft)=
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=Notes on [[Law of diminishing returns]]=


The '''law of diminishing returns''' (LDR) is a concept in economic theory. It states that the output per input (productivity) declines if the input of a production factor is increased over a certain limit. Under the name law of diminishing returns actually exist two different concepts: one ''classical'' and one ''neoclassical''. These concepts bear similarities but are based on different reasons.
__TOC__
==The classical concept==
==The classical concept==
In [[History of economic thought#Classical_Economics|classical economics]] the LDR states the following: If you have at least two different production factors, the highest productivity is gained if an optimal proportion between these factors is kept. Any divergence from that proportion will result in lower productivity.
If one production factor is fixed, the proportion between the production factors will change with rising production i.e. rising input of the variable factor. According to the classical LDR this leads to a production function that has four phases with the following characteristics:
# Rising [[marginal]] productivity, rising average productivity.
# Diminishing marginal productivity, rising average productivity.
# Diminishing average productivity.
# Negative marginal productivity, i.e. an increase of the variable factor will result in a decrease of the overall product.
(Graph)
===History===
===History===
Historically the concept was developed independently by [[Anne Robert Jacques Turgot|J. Turgot]] and [[Johann Heinrich von Thünen|J. v. Thünen]]. It was mainly related to agricultural production and the use of fertilizer in relation to a fixed amount of soil.
[[User:Paul Schächterle/Notebook/LDR/Annotations|(more Material)]]
 
(Ref. to Turgot and Thünen?)
 
Turgot, Observations sur le mémoire de M. de Saint-Péravy en faveur de l'impôt indirect, 1768


===Critique===
===Critique===
A production factor is only fixed if it is indivisible or if it is limited. Therefore it is generally possible to produce with an optimal proportion of factors and to use any available excess portion of one factor in a different area. Thus the classical LDR is closer related to [[business studies]] than to [[economics]] or [[political economy]].


(Ref. possibly Sraffa?)


==The neoclassical concept==
==The neoclassical concept==
In [[History of economic thought#Neoclassical_Economics|neoclassical economics]] the LDR signifies that an increasing input of ''any'' production factor will result in diminishing marginal productivity. This leads to a production function with the following characteristics:
* Zero input of a production factor results in zero output i.e. the graph starts at the [[Origin (Mathematics)|origin]].
* Marginal productivity is highest at the first unit of output.
* Marginal productivity decreases continuously.


(Graph)
===History===
The origins of the neoclassical production function i.e. the neoclassical LDR date back to the time of classical economics. Then the concept was used to describe the effect of an increase in wheat production where good soils were limited. To increase the production of wheat inferior soils would have to be used, which would deliver less wheat for the same amount of labour.<Ref>David Ricardo, 1772—1823, ''An Essay on Profits'', 1815</ref>


===History===
Neoclassical economists extended the idea to the claim that any [[Rationality (Economics)|economically rational]] producer would use any production factor first for the most productive task, then for the next productive task, etc., and/or would use the best unit first, then the second best, etc. Thus the idea got applied to all production factors.
The origins of the neoclassical production function i.e. the neoclassical LDR date back to the time of classical economics. Then the concept was used to describe the effect of an increase in wheat production where good soils were limited. To increase the production of wheat inferior soils would have to be used, which would deliver less wheat for the same amount of labour.
 
(Ref.)


(Ref. to Ricardo, Malthus?)
===Implications===
The general validity of the neoclassical LDR is a necessary condition for the existence of a stable equilibrium in the [[General Equilibrium Theory]] (production sets must be convex).


Neoclassical economists extended the idea to the claim that any [[Rationality (Economics)|economically rational]] producer would use any production factor first for the most productive task, then for the next productive task, etc. (Ref. to whom?) Thus it is applied to all production factors.
(Ref.)
(Necessary assumption: there must exist different applications with different productivities for the units of one factor). <F/H, S. 55, Fn. 4>


===3-D Representation===
===Critique===
In modern neoclassical theory two factors of production are assumed: capital and labour. With two production factors the production function can be represented by a 3-dimensional graph.
The argumentation on which the neoclassical LDR is based requires that there are units of a factor with different quality and/or there are fields of application of the factor with different productivity.


(Graph)
(Ref. <Felderer/Homburg, S. 55, Fn. 4> --> english equivalent?)


Image: [[Cobb-Douglas]] production function with 2 factors and production elasticity complying to the neoclassical LDR, i.e. Y = AC^αL^β, α, β < 1.
The general application of the neoclassical LDR rules out rising marginal productivity and is therefore contrary to the [[economies of scale]]. (Ref ?)


===Implications===
Business studies do not rule out rising marginal productivity and therefore do not accept the general validity of the neoclassical LDR. (Ref.)
The neoclassical LDR is one cornerstone of the [[General Equilibrium Theory]].


===Critique===
According to a survey among business leaders, businesses do not calculate with falling marginal productivity. (Ref: Check: Eiteman/Guthrie 1952)

Latest revision as of 03:31, 22 November 2023


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Notes on Law of diminishing returns

The classical concept

History

(more Material)

Critique

A production factor is only fixed if it is indivisible or if it is limited. Therefore it is generally possible to produce with an optimal proportion of factors and to use any available excess portion of one factor in a different area. Thus the classical LDR is closer related to business studies than to economics or political economy.

(Ref. possibly Sraffa?)

The neoclassical concept

History

The origins of the neoclassical production function i.e. the neoclassical LDR date back to the time of classical economics. Then the concept was used to describe the effect of an increase in wheat production where good soils were limited. To increase the production of wheat inferior soils would have to be used, which would deliver less wheat for the same amount of labour.[1]

Neoclassical economists extended the idea to the claim that any economically rational producer would use any production factor first for the most productive task, then for the next productive task, etc., and/or would use the best unit first, then the second best, etc. Thus the idea got applied to all production factors.

(Ref.)

Implications

The general validity of the neoclassical LDR is a necessary condition for the existence of a stable equilibrium in the General Equilibrium Theory (production sets must be convex).

(Ref.)

Critique

The argumentation on which the neoclassical LDR is based requires that there are units of a factor with different quality and/or there are fields of application of the factor with different productivity.

(Ref. <Felderer/Homburg, S. 55, Fn. 4> --> english equivalent?)

The general application of the neoclassical LDR rules out rising marginal productivity and is therefore contrary to the economies of scale. (Ref ?)

Business studies do not rule out rising marginal productivity and therefore do not accept the general validity of the neoclassical LDR. (Ref.)

According to a survey among business leaders, businesses do not calculate with falling marginal productivity. (Ref: Check: Eiteman/Guthrie 1952)

  1. ↑ David Ricardo, 1772—1823, An Essay on Profits, 1815
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