We can also use the production-possibility frontier to illustrate one of the most famous economic relationships: the law of diminishing returns. This law concerns the relationship between inputs and outputs in the productive process. More specifically, the law of diminishing returns holds that we will get less and less extra output when we add successive doses of inputs while holding other inputs fixed.
As an example of diminishing returns, consider the following controlled experiment: Given a fixed amount of land, say 100 acres, we shall first have no labor at all. We note that with zero labor input there is no com output. So, in Table 2-2, we record zero product when labor is zero.
Now we make a second related experiment. We add 1 unit of labor to the same fixed amount of land. How much output do we now get? Say we observe that we now have produced 2000 bushels of corn.
Now make a third controlled experiment. We still hold land fixed. Once more we vary the labor input, adding exactly the same extra unit of labor as before. That is, we now go from 1 unit of labor to 2 units of labor to match our earlier increase from 0 labor to 1 labor. We await the outcome of the experiment in terms of extra corn produced.
We can now observe whether diminishing returns has set in-that is, we can now see whether the quantity of extra output declines as equal-sized doses of additional inputs are added. Do we have proportional returns, with an extra output of 2000 bushels added to the original output of 2000 bushels? Or do we find diminishing returns, with the additional inputs adding less than the original 2000 bushels of output?
Table 2-2 demonstrates that diminishing returns has indeed set in. The second extra unit of labor added only 1000 bushels of additional output, which is less than what the first unit of labor added. A third extra unit of labor adds even less additional output than does the second, and the fourth unit adds yet a bit less. The hypothetical experiment reported in Table 2-2 thus shows numerically what happens when the law of diminishing returns holds.
The law of diminishing returns is an important and often-observed economic relationship. But it is not valid for all technologies. Often the law holds only after a number of units of inputs have been added. Put differently, the first few units of inputs might actually yield increasing extra returns, since we may need a minimum amount of labor just to walk to the field and pick up a shovel. But, ultimately, decreasing returns will prevail at high levels of inputs for most technologies.