Diminishing returns to a factor means that total product or TP increases at a diminishing rate and marginal product or MP falls but remains positive when more units of a variable factor are employed with a given amount of fixed factor.
The two reasons for the operation of diminishing returns to a factor are given below:
i-Factors of production can be substituted for one another, but only till a certain limit. For example, labour can be replaced with machinery or vice-versa but only till a limit. Beyond this, substituting factors is not possible. The factors are imperfect substitutes leading to diminishing returns.
ii- After achieving the optimum combination of variable and fixed factors, the level of efficiency begins to fall, when more units of a variable factor are employed. Thus, the marginal product begins to fall.
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