Sometimes also referred to as the law ofvariable proportions , this "law" is really a generalization economists make about the nature of technology when it is possible to combine the same factors of production in a number of different proportions to make the same product. The law states:
When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller.
(That is, first the marginal returns to successive small increases in the variable factor of production turn down, and then eventually the overall average returns per unit of the variable input start decreasing.) Since the law assumes that the available quantity of atleast one factor of production is fixed at agiven level and that technological knowledge does not change during the relevant period, the lawof diminishing returns normally translates intoa statement about the short-run choice of production possibilities facing a firm (since in the longer run it is virtually always possiblefor the firm to acquire more of the temporarily "fixed" factor -- building an additional factory building, buying additional land, installing additional machines of the same kind, installing newer and more advanced machinery, and so on.
