What is the law of diminishing marginal product?
The Law of Diminishing Marginal Product states that as more units of a variable factor are employed while keeping other factors fixed, the marginal product initially rises but eventually starts falling after reaching a certain level of employment.
Initially, when the variable input is increased, the factor proportions become more suitable for production, leading to an increase in marginal product. However, after a certain level of employment, the production process becomes too crowded with the variable input, and the marginal product begins to fall.
This law is also called the Law of Variable Proportions. The MP curve takes the shape of an inverse 'U' — it first increases and then decreases.
Explanation
The textbook explicitly defines this law in section 3.4. It explains that the marginal product initially rises because factor proportions become more suitable for production as the variable input increases. However, after a certain employment level, the production process becomes 'crowded,' causing MP to fall. The context also mentions that this law is alternatively called the law of variable proportions, and the MP curve is inverse U-shaped.