Question

Explain the concept of “diminishing productivity of capital.” Be sure to address the assumptions that are made for this condition to hold

Answer 1

When the capital is raised, it will initially lead to increase in production. If the capital is raised again, the production may increase again but by a lower margin. So if we continue to put in more capital, the marginal increase in production will continue to diminish till it reaches zero or it may even have a negative effect. This principle is diminishing productivity of capital.

Assumptions:

1. No change in technique of production

2. The prices remain constant.

3. All units of variable factors are equally efficient