The law of diminishing returns applies to capital and labor as well as to land. To illustrate its application to capital, a fixed quantity of capital invested in a manufacturing plant may be considered. If when the plant is undermanned the amount of labor is gradually increased, for a time the product will be increased per unit of labor applied to the capital. But after the point is reached where the plant is fully manned, a further increase in the number of laborers will give less than a proportionate return per laborer employed. This will be true for the reason that the laborers will now be, to a certain extent, in one another's way. There will not be machinery enough to keep all the men occupied, and so one laborer will have to wait for another to finish using the machine which he desires to use. In other words, as the amount of labor is increased the total product will be increased but the product per laborer will be diminished. The law of diminishing returns is at work.

The law of diminishing returns also applies to labor. This will be seen where the number of laborers remains constant and a varying amount of capital and land is used. If a relatively small amount of capital and land is used with a given amount of labor, a certain product will result. If now the amount of land and capital employed is increased and the amount of labor remains constant, the total product as well as the product per unit of capital and land is increased. But if the capital and land employed continues to increase without any change in the amount of labor employed, a point is finally reached where a further increase in the capital and land will give an increased total product but a diminished product per unit of capital and land. Here again we are in the presence of the law of diminishing returns.

Questions

1. What does producing wealth mean? Can man create matter?

2. Name the four ways in which utilities may be produced. Give examples.

3. What are the two primary factors in production?

4. What four factors in production are commonly spoken of by writers on economics?

5. As the economist uses the term, what is meant by land?

6. Show how production is influenced by the physical geography of a country.

7. Make a classification of the different uses of land from the economic point of view.

8. Why do not all of the agricultural laborers of the country concentrate their labor upon the most fertile soil of the country, leaving all less fertile soil uncultivated?

9. State the law of diminishing returns. Give an illustration.

10. How do improvements in the soil and in methods of cultivation affect the law of diminishing returns?

11. What is meant by the extensive margin of cultivation? By the intensive margin of cultivation?

12. Does the law of diminishing returns apply to city building lots? Illustrate.

13. Does the law of diminishing returns apply to capital and labor as well as to land? Explain.

Supplementary Reading

Carver, Distribution of Wealth, Chap. i.

Devas, Political Economy, Book I, Chap. i.

Ely, Outlines, Chap. ix.

Johnson, Introductory Economics, Chap. vi.

Marshall, Principles, Book IV, Chap, ii.-iii.

Seager, Principles, Chap. viii.

Seligman, Principles, Chaps, xviii. and xx.

Walker, Political Economy, Part II., Chap. i.