THE LAW OF DIMINISHING RETURNS (LAW OF VARIABLE PROPORTIONS)
One of the most important and fundamental principles involved in economics called the law of diminishing returns or variable proportions. We may state it thus:
The law of diminishing returns comes about because of several reasons:
1. The ability of labour to substitute for the fixed quantity of land.
2. The marginal physical output of labour increases for a time, as the benefits of specialization and division of labour make for greater efficiency.
3. Later all the advantages of specialization are exhausted.
4. The law of diminishing returns comes about because each successive unit of the variable factor has less of the fixed factor to work with. In fact, they therefore start getting in the way of others with the fixed factor with consequent decline in output.
We can see the law leads to three stages of production, namely, stage of:
1. Increasing returns
2. Diminishing returns
3. Negative returns