User:Paul Schächterle/Notebook/LDR

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Notes on Law of diminishing returns

The classical concept

History

(more Material)

Critique

A production factor is only fixed if it is indivisible or if it is limited. Therefore it is generally possible to produce with an optimal proportion of factors and to use any available excess portion of one factor in a different area. Thus the classical LDR is closer related to business studies than to economics or political economy.

(Ref. possibly Sraffa?)

The neoclassical concept

History

The origins of the neoclassical production function i.e. the neoclassical LDR date back to the time of classical economics. Then the concept was used to describe the effect of an increase in wheat production where good soils were limited. To increase the production of wheat inferior soils would have to be used, which would deliver less wheat for the same amount of labour.

Neoclassical economists extended the idea to the claim that any economically rational producer would use any production factor first for the most productive task, then for the next productive task, etc., and/or would use the best unit first, then the second best, etc. Thus the idea got applied to all production factors.

(Ref.)

Implications

The general validity of the neoclassical LDR is a necessary condition for the existence of a stable equilibrium in the General Equilibrium Theory (production sets must be convex).

(Ref.)

Critique

The argumentation on which the neoclassical LDR is based requires that there are units of a factor with different quality and/or there are fields of application of the factor with different productivity.

(Ref. <Felderer/Homburg, S. 55, Fn. 4> --> english equivalent?)

The general application of the neoclassical LDR rules out rising marginal productivity and is therefore contrary to the economies of scale. (Ref ?)

Business studies do not rule out rising marginal productivity and therefore do not accept the general validity of the neoclassical LDR. (Ref.)

According to a survey among business leaders, businesses do not calculate with falling marginal productivity. (Ref: Check: Eiteman/Guthrie 1952)