The Law of Diminishing Returns describes the point where adding more of a variable input, while keeping other inputs fixed, leads to smaller and smaller increases in output.

Identifying the Start of Diminishing Returns

To understand when the Law of Diminishing Returns begins, let's look at the behavior of Total Product (TP) and Marginal Product (MP):

• Increasing Returns Stage: In this phase, adding more variable input causes TP to increase at an increasing rate. MP is rising and is positive.
• Diminishing Returns Stage: This stage begins when the additional output gained from each extra unit of input starts to decrease. MP is still positive but starts falling. TP increases at a decreasing rate.
• Negative Returns Stage: Eventually, adding more input can cause TP to fall. MP becomes negative.

Marginal Product Behavior

The key indicator for the start of the Law of Diminishing Returns is the behavior of the Marginal Product (MP), which is the extra output produced by adding one more unit of input.

• When MP is rising, we are in the stage of increasing returns.
• The Law of Diminishing Returns begins precisely when the MP stops rising and starts falling, even if it remains positive. This signifies that each additional unit of input is contributing less to total output than the previous unit.
• TP continues to rise during this stage, but at a slower pace.

Conclusion

Therefore, the Law of Diminishing Returns starts to operate when the Marginal Product begins to fall.