The person who coordinates the factors of production is an entrepreneur. In order to earn profit, the entrepreneur coordinates the factors of production in such a way that he minimizes his cost of production. How he will coordinate this factors (land, labour, capital, entrepreneur), will determine whether he will experience increasing returns or constant returns or diminishing returns or negative returns.

The Law of Diminishing Returns or the Law of Variable Proportion

This law states that “if to a fixed factor successive units of variable factors are added, marginal product will begin to rise and later on will start to fall”.

ASSUMPTIONS

This law is based on the following assumptions:

• There are only two factors of production namely: land and labour.
• Land is fixed and labour is changing.
• There are no changes in technology. It can be illustrated on tables and graphs below.

EXPLANATION OF THE TABLE

The following phrases of the law of diminishing returns can be identified.

°Increasing Returns

At this stage, marginal product (MP) is increasing. This implies that total product (TP) is increasing at an increasing rate (1st  to 4th worker).

°Constant Returns

At this stage Marginal Product (MP) is constant (fixed), that is Total Product (TP) is increasing at a constant rate (4-5 level of employment).

°Diminishing Returns

At this stage MP is falling. TP is increasing at a decreasing rate. After the (5th  worker) diminishing returns set in.

°Zero Returns

It occurs when M.P is zero and TP is at the highest. It is experienced when the (5^th worker is employed).

°Negative Returns

Here, MP is negative and TP is falling. It is experienced when the 10^th worker is employed.

Graph Representing the Law of Diminishing Returns

1. The law of variable proportion is applicable to all factors of production.
2. When TP is at the highest level MP equals zero.
3. MP is negative at the employment of the 10^th worker.