It has been by experience that an increase in the amount of capital and labour causes in general a less than proportionate increase in the amount of the produce raised. This is Law of Diminishing Returns. This law is nothing but a generalization drawn from the practical experience of farmers.
The producing capacity of the soil is limited. It is subject to exhaustion. Up to point we can profitably increase the application of labour and capital in the cultivation of a plot of land. The employment of further doses of labour and capital lead to depletion of valuable properties of soil. The result is that there are disproportionate returns.
Prof. Marshall states the law in the following words: “An increase in the capital and labour applied in the cultivation of land causes in general a less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture.
This law is specially found to be operating in agriculture and other extractive industries like mining, fishing, etc. wherein natural supplies play an important part. Its influence is, however, ultimately felt in all industries. It is because production is in the last analysis, dependent on nature for raw materials, and man’s abilities, particularly his managing abilities are limited. They also yield diminishing returns if they are also over – taxed or over-strained.
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