The operation of the law of diminishing returns is best observed in agriculture. Obviously, the product to be gained from a plot of land by one man unaided by machinery of any sort would be relatively small. He could, as the primitive American Indian did before him, scratch the ground with a sharpened stick and cultivate his crops with a shell. Given a strong hoe, it is likely that he could materially increase the quantity of his crop. Thus, step by step with the aid of horses, improved machinery, drain tile, fertilizer, and laborers our farmer would find it possible for a time to increase the product of his land faster than his increase in the application of labor and capital. He would find also that eventually the product arising from the addition of a unit of labor and capital was less than the product arising from the application of the preceding unit. Then he would have reached the point of diminishing returns. Further applications of labor and capital would show a constant decrease in product attributable to the successive units of labor and capital employed. Presently the point of greatest efficiency would be reached, which we may say is the point where labor and capital can be applied to the very best advantage on this particular piece of land.

It will aid in understanding this important law if we resort to a graphic illustration. Suppose a farmer has a unit of labor and capital which he applies to a given piece of land with the result that he gets a product of 8, represented in Fig. 7 by the letter a. Suppose further that the application of another unit brings an additional product of 13 (b); of another, 16 (c); of another, 18 (d); and of another, 17 (e). Clearly, the fifth unit of labor and capital produces less than does the fourth unit. Hence, the point of diminishing returns is between these two units, at E. Additional units of labor and capital may be applied, however, before the point of greatest efficiency is reached. According to our assumption, the fifth unit of labor and capital will yield a product of 17 (e), which is greater than can be had on new land similar to the piece of land which we have under consideration, for the product (17) exceeds the average product of the preceding units (8+13+16+18/4 = 13 3/4).

Also, our farmer will find it advantageous to apply a sixth unit of labor and capital, which, we have assumed, will yield a product of 15 (/), for this is greater than the average yield of the five units already applied. The total product of the six units is 87 (8 + 13 + 16 + 18 + 17 + 15), or an average of 14 1/2- (87 ÷ 6). If similar new land is available he cannot afford to apply a seventh unit of labor and capital which yields anything less than 14 1/2. He will not apply the seventh unit, which yields a product of but 13 (g). The point of greatest efficiency, then, is between units 6 and 7, designated in Fig. 7 as G. But the point of diminishing returns and the point of greatest efficiency may coincide. Suppose the fifth and sixth units of labor and capital yield a product of 13 and 11

instead of 17 and 15. In that case the application of the fifth unit would be accompanied by a decline in product relative not only to the fourth unit but also to the average yield of the four already applied.