The Law of Diminishing Marginal Productivity

In his discussions of the Law of Diminishing Returns, Malthus did not distinguish between average and marginal productivity. However, in modern economics, we think of diminishing returns primarily in terms of marginal, not average, productivity. Thus, we would state the law this way:

Law of Diminishing Returns (Modern Statement):: When the technology of production and some of the inputs are held constant and the quantity of a variable input increases continually, the marginal productivity of the variable input will eventually decline.

The inputs that are held steady are called the "fixed inputs." In these pages we are treating land and capital as fixed inputs. The inputs that are allowed to vary are called the "variable inputs." In these pages we are treating labor as the variable input.

Another way to express the law of diminishing returns, is that, as the variable input increases, the output also increases, but at a decreasing rate. The marginal productivity of labor is the rate of increase in output as the labor input increases. To say that output increases at a decreasing rate when the variable input increases is another way to say that the marginal productivity declines.