User:Paul Schächterle/Notebook

Law of diminishing returns (Raw draft)

The law of diminishing returns (LDR) is a concept in economic theories. It states that the output per input (productivity) declines if the use of one production factor is increased. There actually exist two different concepts under this name: one classical law of diminishing returns and one neoclassical.

The classical concept

In classical economic theories 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 used. Any divergence of 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:

1. Rising marginal productivity, rising average productivity.
2. Diminishing marginal productivity, rising average productivity.
3. Diminishing average productivity.
4. Negative marginal productivity, i.e. an increase of the variable factor will result in a decrease of the overall product.

(Graph)

Historically the concept was developed independently by J. Turgot and J. v. Thünen. It was mainly related to agricultural production and the use of fertilizer.

(Production of wheat, use of inferior soils --> neoclassical concept?)