The law of diminishing returns and Law of increasing returns

The law of diminishing returns

The law of diminishing returns is a very important law of microeconomics. According to this law

As more and units of variable factors are applied to fixed factors, after a certain marginal product becomes smaller and smaller.

                                                            OR

The tendency of marginal product to decrease per unit of variable factor applied to fixed factors is called the law of diminishing returns.

This law can be explained with the help of following schedule and graph.

                                                                       

                                                       Schedule

Fixed factor   (land)	Variable factor   (labour)	Tp  (Wheat in kg)	Mp
2 Acre	1	25	25
2 Acre	2	45	20
2 Acre	3	60	15
2 Acre	4	70	10
2 Acre	5	75	5

Explanation:

In the above schedule. When first unit of labour is applied to a fixed piece of land 2 acre marginal product is 24 kg of wheat. When second unit of variable factor (labour is applied to fixed factor marginal product decreases to 20 kg. with the application of 3^rd,4^th and 5^th units of labour marginal product goes down to 15,10 and 5 kg respectively. 

Graphical representation:

If we plot data in the schedule we get the following graph.

Explanation:

In the above diagram units of labour are shown along x-axis while marginal product is shown along y-axis marginal product of first unit of labour is 25, so we draw a straight vertical line from first unit of labour and also draw a straight horizontal line from MP 25, where both the line intersect each other we get points a. similarly we get points b, c, d and e. by joining these points we get MP curve, which falls from left to the right showing the law of diminishing returns. 

Law of increasing returns:

                Laws of increasing return are an important law of economics. According to this law.

            “As more and more units of variable factor are applied to fixed factor, marginal product up to a certain point increase”

                                                                        OR

            The tendency of marginal product to increase per unit of variable factor applied to fixed factor is called law of increasing returns.

            This law can be explained with the help of the following schedule.

                                Schedule 

Fixed factor  (machine)	Variable factors   (labuor)	Total Product  (cloth in meter)	Marginal Product
5	1	2	2
5	2	6	4
5	3	12	6
5	4	20	8
5	5	30	10

Explanation: 

In the above schedule when first unit of variable factor (labour) is applied to fixed factor (5 machines) marginal product is 2 meter of cloth. When second unit of labour is applied to fixed factor marginal product increases to 4 with the application of 3^rd, 4^th and 5^th unit of labor marginal product is 6, 8 and 10 respectively.

Graphic representation: 

If we plot data table we get the following graph.

Explanation:

In the above graph units of labour are measured along x-axis while marginal product is measured along y-axis marginal product of first unit of labour is 2, so we draw a straight vertical line from first unit of labour and also draw a straight horizontal line MP 2. Where both these lines interest each other we get point a. similarly we get point b, c, d, e. by joining these points we get MP curve, which has position slope showing law of increasing returns.