DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : P. Sankara Rao
Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Polytechnic, Srikakulam
Year/Semester : V Semester
Subject : Business Economics I
Subject Code : CCP 502
Topic : Laws of Production
Duration : 50 mts.
Sub Topic : Law of diminishing returns - Applications
Teaching Aids : PPT & Animation

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Objectives

After completion of this period, you would be

able to:
 Know the applications of law of diminishing
returns
 Know the importance of law of diminishing
returns
 Explain the classical approach of the law

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Recap

In the earlier class we have already learnt:

 The law of diminishing returns with the help of a
diagram
 Various assumptions under lying to the law of
diminishing returns

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Law Of Diminishing Returns- Applications

 Marshal applied the operation of this law to

agriculture, fisheries, mining, forests and building
industry.
 The law applies to agriculture both in its intensive
and extensive forms.
 The application of additional units of labour and
capital to a piece of land causes diminishing
returns.

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Applications Contd..

 This law also applies to rivers or tank fisheries.

 Additional doses of labour and capital; does not
bring proportional; increase to the amount of fish
caught.
 In case of mines and brick fields the continued
application of labour and capital will result in
diminishing rate of return.

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General form

 The law of diminishing returns is not applicable to

agriculture and extractive industries alone, rather
it is of universal applicability.
 It is called the law in its general form.

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Law of Diminishing Returns - Importance

 The universal applicability of this law has taken

economics to the realm of science.
 It forms the basis of a number of doctrines in
economics.
 The Malthusian theory of population is based on
this law.

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Importance Contd..

 Ricardian theory of rent is based on this law.

 Diminishing marginal productivity is the basis for
the theory of distribution of national income to the
factors of production.
 The theory of pricing of products is based on the
law.
 The behaviour of costs of production is based on
the law.

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Importance Contd..

 The least cost combination of factors is based on

this law.
 This law is of great importance in understanding
the problems of under developed countries
because agriculture is the main occupation in
such countries.

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Causes Of Diminishing Returns

The law of diminishing returns operates

due to the following reasons:
 Scarcity of factors
 Imperfect substitutability
 Wrong combination of factors of production
 Factors are not homogenous

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Classical approach

 The classical economists including Marshall

thought that the law of diminishing returns applies
agriculture only. The reasons are:
 Land supply cannot be increased. It has to be
kept constant
 Agricultural operations are spread over a wide
area and therefore supervision cannot be
effective

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Summary

In this session we have learnt

 The applications of law of diminishing returns
 Importance of law of diminishing returns
 The classical approach of the law

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Frequently asked questions

1. State any four points about the importance of

law of diminishing returns

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