STAGE OF DIMINISHING RETURNS

 Stage of Diminishing Returns: 

 The total product continues to increase at a diminishing rate until it reaches its maximum at point H, where the second stage ends. In this stage, both marginal product and average product of the variable factor are diminishing but are positive. At the end of this stage i.e., at point M (corresponding to the highest point H of the total product curve), the marginal product of the variable factor is zero. It is known as the stage of diminishing returns because both the average and marginal products of the variable factors continuously fall during this stage. This stage is very important because the firm will seek to produce within its range.

Explanation of law of diminishing returns:

 The question arises as to why we get diminishing returns after a certain amount of the variable factor has been added to the fixed quantity of that factor. As explained above, increasing returns occur primarily because of more eflcient use of fixed factors as more units of the variable factor are combined to work with it. Once the point is reached at which the amount of variable factor is suflcient to ensure eflcient utilisation of the fixed factor, any further increases in the variable factor will cause marginal and average product to decline because the fixed factor then becomes inadequate relative to the quantity of the variable factor. Continuing the above example, when four men were put to work on one machine, the optimum combination was achieved. Now, if the fifth person is put on the machine, his contribution will be nil. In other words, the marginal productivity will start diminishing.

The phenomenon of diminishing returns, like that of increasing returns, rests upon the indivisibility of the fixedfactor. Just as the average product of the variable factor increases in the first stage when better utilisation of the fixed indivisible factor is being made, so the average product of the variable factor diminishes in the second stage when the fixed indivisible factor is being worked too hard. Another reason ouered for the operation of the law of diminishing returns is the imperfect substitutability of one factor for another. Had the perfect substitute of the scarce fixed factor been available, then the paucity of the scarce fixed factor during the second stage would have been made up by increasing the supply of its perfect substitute with the result that output could be expanded without diminishing returns.

Goods and Service Tax Book (Updated upto 20th January 2018)

GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Intermediate and CA final. 

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Author Name- CA Harshita Raichandani and CA Dhananjay Ojha

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GST (Goods and Services Tax) Book -A student friendly Book. - Bharat Gurukul

GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Inte