In the cultivation of a given area of land there is a certain amount of capital and labor which when supplied will produce the greatest amount of produce per unit of capital and labor. When we supply just this amount of capital and labor we say that we have reached the point of diminishing returns in the application of capital and labor to the land. If we apply more capital and labor than the amount which brings us to the point of diminishing returns, there is an increase in the total product of the given area of land, but the increase is not so great relatively as the increase of capital and labor. In other words, while the total product increases, the product per unit of capital and labor diminishes. Likewise, if we apply a smaller amount of capital and labor than that necessary to reach the point of diminishing returns, there is a less than proportionate return on the capital and labor applied. The following table will illustrate the situation. The first column represents the number of units of capital and labor employed in cultivating a tract of one hundred sixty acres. The second column represents the number of bushels produced per acre of land; the third column, the total number of bushels produced on the one hundred sixty acres; and the fourth column, the number of bushels produced per unit of capital and labor applied to the land.

In the foregoing table we find that by increasing the application of capital and labor from five to six units we have not only increased the total number of bushels on the given area, but we have also increased the returns per unit of capital and labor. We are here operating under a law of increasing returns. But after we have passed the point of diminishing returns where we apply six units of capital and labor in our illustration and get three hundred thirty bushels per unit expended, we begin to operate under the law of diminishing returns. Each additional unit of capital and labor applied means an addition to the total product but a decrease in the average product per unit of capital and labor. We may summarize the law of diminishing returns as follows: After a certain point has been passed in the application of labor and capital to land, other things being equal, the application of additional units of capital and labor gives less than a proportionate return.

46. "Other things being equal." - In stating the law of diminishing returns the phrase "other things being equal" was used. This is intended to convey the idea that the only changes which were taking place were the ones stated, namely, an increase in the number of units of capital and labor and such other changes as were occasioned by this change. If, however, other things did not remain equal, if, for instance, the quality of the soil was being changed by improved methods of cultivation, while the addition was being made to the supply of capital and labor, we might have passed the point of diminishing returns mentioned above, and still, owing to the improvement of the soil, receive increased returns relatively to the capital and labor expended. Or again the additional capital may be in the form of improved machinery which makes the labor much more effective than it had been heretofore, and in that case the returns may continue to increase proportionately to the increase in capital and labor. It is sometimes said that improvements in methods of cultivation have overthrown the law of diminishing returns. As the law is generally understood this is not true. Improvements in methods of cultivation have mitigated the rigors of some of the consequences of the law, but the law itself still exists.