Principle of Diminishing Returns in Agribusiness

As more and more units of a variable input are added to a production process, a point is reached where the resulting output is no longer considered economically sensible. The principle of diminishing returns depicts the various points on the total product curve where increasing input units lead to corresponding total product.

This principle guides the decision-making process on the optimal level of a variable input to utilize in the production process.

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The Principle of Diminishing Returns in Agribusiness

The principle of diminishing returns has a special application in the science of farm management. That is, when considering the level of output or yield from a fixed area of land, such as one hectare, or production from a single livestock or crop.

The law of diminishing returns, which was originally propounded by David Ricardo (1771-1823), in relation to the ability of an agrarian economy with a growing population, fixed agricultural land, and variable inputs to expand her output of food, states that if more of a variable input is continuously added to a fixed factor (e.g., land), the total product will first increase at an increasing rate, then at a decreasing rate, and thereafter start to decline as it reaches its maximum.

It could be noticed that as successive kg of fish feed were applied in the process, the total product curve responded favorably, albeit with varying levels of marginal additions, until the point at which the feed quantity reached 9 kg.

Thereafter, the total product curve sluggishly (indicating fast decreasing marginal returns) moves to the maximum level at feed level 15 kg (where the marginal returns equal zero) and begins to face downwards (where the marginal returns progressively become more negative). Beyond feed level 15 kg, it does not make any economic sense for the fish farmer to continue increasing the quantity of feed.

This principle guides the efficient allocation of resources in that as more resources are added, more yields are expected up to a certain level in the production process.

Again, if resources are constantly added, it reaches a point where the output begins to decrease. This decreasing stage helps in realizing the proper ways of utilizing limited resources. The principle guides decision-making on the optimal level of a variable input to utilize in the production process.

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Rational Allocation of Resources in Agribusiness

Rational allocation of resources requires careful consideration of the principle of diminishing returns to determine the optimal level of resources to apply. By understanding this principle, agribusinesses can maximize productivity and efficiency while avoiding unnecessary waste of inputs.

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