The Law of Diminishing Marginal Returns or Productivity

We have just talked about the law of marginal utility. Remember that it is the law that explains the value of economic goods. Well, from the standpoint of the individual actor, the other essential law we’re going to present now, and which, when the time comes, will help us understand the market process with respect to factors of production (labor, capital goods and natural resources), is the law of diminishing marginal returns or productivity. Notice that in economics, we are increasingly going to add on the term “marginal,” or “in the margin.” In fact, Austrian economics is also called “subjectivist economics” or “marginalist economics.” We will be discovering together that it is curiously the last actors, the least involved, the last valuations that determine the market prices. It’s marvelous and surprising, but it’s true. Well, today I’m going to explain the law of diminishing marginal productivity. This law says that there are optimal proportions in which to use the factors of production, or higher-order economic goods, to produce what we called first-order economic goods, or consumer goods—those that directly satisfy human needs. I don’t like to use graphs, and in fact, I explain economics without using graphs, but occasionally during the year, I make an exception and use one, and I’m going to do that today. I’m going to use a graph and explain the law of diminishing marginal returns or productivity with regard to two factors of production.