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When You Start Experiencing Diminishing Returns

written by: N Nayab•edited by: Elizabeth Wistrom•updated: 5/19/2011

The law of diminishing marginal productivity holds that the marginal increase in total output declines with increase in additional units of a variable input after a certain point. This find use in the home office to determine optimal work schedules.

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    Getting Less Bang for Your Buck?

    The law of diminishing marginal productivity or diminishing marginal utility holds that the continuous addition of more units of a variable input to fixed inputs may increase the total marginal output initially, but after the addition of a certain number of units, the rate of marginal increase becomes constant, and at an even later stage, the rate of marginal increase in output starts to decline with the additional of more inputs.

    The noted economist T. R. Malthus, Edward West, and David Ricardo, first introduced the concept of diminishing marginal productivity in 1815 for applications of factors to a fixed plot of land. John Bates Clark first applied this theory to work in 1889.

    Image Credit: flickr.com/gideonstrauss

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    Law of Diminishing Marginal Productivity of Labor

    Marginal productivity of labor is the additional output resultant from the addition of one unit of labor, with all other inputs remaining constant.

    The law of diminishing marginal productivity of labor is no different from the original law of diminishing marginal productivity for land. It holds that other conditions remaining constant, the longer the laborer works, the lesser the efficiency or productivity. The skill of producing or processing decreases by the hour until the worker becomes exhausted and productivity reaches zero.

    Another dimension to the law of diminishing marginal productivity of labor is that total marginal output decrease with the addition of each extra worker to a task. The increase in total output is not in direct proportion to the output of an individual worker. For instance, while one worker working in a field might reap ten sacks of the crop, two workers in the same field might reap only eighteen sacks of the crop.

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    Illustration of Law of Diminishing Marginal Productivity in the Home Office

    The law of diminishing marginal productivity finds application in the home office to determine optimal work schedules and determine whether hiring an assistant would increase profits

    The following two examples illustrates the application of the law of diminishing marginal productivity in the home office.

    1. A home worker might transcribe 30 medical transcription records in the first hour, eighteen in the sixth hour, and just two in the eighth hour. The addition to the total output decrease with every additional hour worked due to diminishing marginal productivity. The reason for the same could be exhaustion and some other factors.
    2. A work from home entrepreneur making gift baskets might normally produce ten gift baskets a day. Adding an assistant with the same skill-set will not raise the total output to twenty, but to seventeen or eighteen. This is because the work slows down as both men share the tools, raw materials, and workspace. On the other hand, if the entrepreneur makes these ten baskets by working five hours, and decides to work for a further five hours, he or she would not make twenty baskets, but might make only seventeen or eighteen baskets.

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    Uses of Law of Marginal Productivity in the Home Office

    Law of Diminishing Marginal Productivity Home workers need to apply the law of diminishing marginal productivity to find out the point where an increase in effort will lead to such reduced marginal output that the increased effort becomes non viable.

    Assume the remuneration for transcribing a unit of medical record at the home office is $1, and the normal hourly wage for office work as $20, and assume the productivity of the home worker while transcribing medical records as follows:

    • 1 hour: total 30 records
    • 2 hour: total 60 records (30 records added, marginal productivity decrease: 0)
    • 3 hours: total 88 records (28 records added, marginal productivity decrease: 2)
    • 4 hours: total 114 records (26 records added, marginal productivity decrease: 2)
    • 5 hours: total 137 records (23 records added, marginal productivity decrease: 3)
    • 6 hours: total 155 records (18 records added, marginal productivity decrease: 5)
    • 7 hours: total 166 records (11 records added, marginal productivity decrease: 7)
    • 8 hours: total 168 records (2 records added, marginal productivity decrease: 9)
    • 9 hours: total 168 records (0 records added, totally exhausted)

    Working at home for piece rate becomes profitable only till the 5th hour, when the marginal productivity fetches $23, against the standard hourly rate of $20. From the sixth hour, decrease in marginal productivity makes this work non-attractive.

    Using the same illustration, using the law of diminishing marginal productivity identifies the optimal duration of a work session as five hours. The home worker would work better by stopping the work after five hours and starting afresh at a later time.

    Image Credit: flickr.com/blupics

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    Drawbacks

    While most neoclassical theorists accept diminishing marginal productivity of labor as an a universal phenomenon, the law is not conclusive, and economists such as Francis A. Walker (1891) have challenged this theory and recognized the possibility of marginal productivity actually continuing to increase without decreasing.

    A major drawback of the law of diminishing marginal productivity is that productivity and output depend on a host of factors such as the right tools, skill sets and the like, which the law of diminishing marginal productivity does not consider. This law assumes all other factors always remain constant, which is not the case in real life.

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    Reference

    The New School. The Production Function. Retrieved from: http://homepage.newschool.edu/het//essays/product/prodfunc.htm#diminishing