1. Unit 2: Economic Principles in Agribusiness Lesson: EP1
Diminishing Returns
Unit 2: Economic Principles in Agribusiness
Lesson: EP1

2. Objectives Lesson Objective:
After completing the lesson on diminishing returns, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Diminishing Returns Career Development Event Evaluation.
Enabling Objectives:
Define total product (TP), marginal product (MP), and average product (AP) and identify the relationship between them to illustrate the principle of diminishing physical returns.
Define total revenue (TR), total cost (TC), marginal revenue product (MRP), and marginal input cost (MIC), and use them to illustrate the principle of diminishing economic returns.
Define the point of maximum profit and maximum production and the relationship between the two.

3. Key Terms Total product Marginal product Average product
Diminishing physical returns
Diminishing economic returns
Total revenue
Total cost
Marginal revenue product
Marginal input cost

11. Percent Satisfaction Received
My Satisfaction
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 3 95 4
100 5 40

12. Percent Satisfaction Received
Total Product
Total product is the total output or yield
Represented using the letters TP
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 3 95 4
100 5 40

13. Percent Satisfaction Received
Marginal Product
Marginal product is the change in output resulting from each additional unit of input
Represented using the letters MP.
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 10 3 95 35 4
100 5 40
-60

14. Percent Satisfaction Received
Average Product
Average product is the amount of output produced divided by the number of units of input
Represented using the letters AP
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 10 30 3 95 35
31.667 4
100 5 25 40
-60 8

15. As TP begins to increase, what is happening to MP and AP?
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 10 30 3 95 35
31.667 4
100 5 25 40
-60 8
As TP is increasing at an increasing rate, MP and AP are also increasing.

16. As TP continues to increase, what happens to MP and AP?
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 10 30 3 95 35
31.667 4
100 5 25 40
-60 8
As TP continues to increase, MP begins to decrease, and then AP begins decreasing.

17. When MP becomes negative, what happens to TP?
Number of Items Eaten
Percent Satisfaction Received
Number of Inputs Added
Marginal Product (MP)
Average Product (AP)
Total Product (TP) 1 50 2 60 10 30 3 95 35
31.667 4
100 5 25 40
-60 8
Once MP becomes negative, TP begins decreasing.

18. More practice…
What to Do?

19. What to Do?
Workers
Jobs/Day (TP) MI MP AP 1 4 xx 2 7 3
3.5 9

20. Principle of Diminishing Physical Returns
The principle of diminishing physical returns states that at some point in time the marginal product decreases with each additional unit of input.

21. Principle of Diminishing Economic Returns
The principle of diminishing economic returns states that beyond some point marginal economic returns decrease with each additional unit of input

22. Total Revenue Total revenue is the total income from all the jobs
Represented using the letters TR.
Workers
Jobs/Day (TP) MI MP AP TR TC
MRP
MIC 1 4 xx
$140 2 7 3
3.5
$245 9
$315

23. Total Cost Total cost is the cost of each employee
Represented using the letters TC.
Workers
Jobs/Day (TP) MI MP AP TR TC
MRP
MIC 1 4 xx
$140
$80 2 7 3
3.5
$245
$160 9
$315
$240

24. Marginal Revenue Product
Marginal revenue product is the increase in income created by adding an additional input by hiring another employee
Represented using the letters MRP
MRP = change in revenue / change in input (MI)
Workers
Jobs/Day (TP) MI MP AP TR TC
MRP
MIC 1 4 xx
$140
$80 2 7 3
3.5
$245
$160
105 9
$315
$240 70

25. Marginal Input Cost
Marginal input cost is the increase in total cost with each additional unit of input
Represented using the letters MIC
MIC = change in cost ($) / change in input
Workers
Jobs/Day (TP) MI MP AP TR TC
MRP
MIC 1 4 xx
$140
$80 2 7 3
3.5
$245
$160
105 80 9
$315
$240 70

26. How long should Michelle continue to hire employees?
As long as MRP is greater than or equal to MIC
MRP ≥ MIC
Workers
Jobs/Day (TP) MI MP AP TR TC
MRP
MIC 1 4 xx
$140
$80 2 7 3
3.5
$245
$160
105 80 9
$315
$240 70

27. How many workers should Austin hire?
Austin owns a lawn mowing service and is considering expansion. He must decide how many workers to hire when his employees receive $50 per week and he gets paid $15 per lawn.
Number of Workers
Lawns per week (TP) MI AP MP TR
MRP TC
MIC 1 12
180
xxx 50 2 25
12.5 13
375
195
100 3 35
11.6 10
525
150 4 44 11 9
660
135
200 5 6
750 90
250 55
9.2
825 75
300 7 58
8.3
870 45
350 8 60
7.5
900 30
400 61
6.8
915 15
450 -1
-15
500
How many workers should Austin hire?
6 workers

28. A farmer is looking at a precision ag firm that can apply fertilizer in 10 lb. increments. The cost of fertilizer is $0.55/lb. Corn is selling for $5.00 per bushel. He has one field that is a mix of Soils A and B. The field is 80 acres with 50 acres of Soil A and 30 acres of Soil B. He has determined that his yields will respond according to the following table:
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP -MIC
Soil B
MRP - MIC
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815

29. How much fertilizer should he apply per acre if he fertilizes the entire field based on Soil Type A?
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
150 lbs. b/c MRP is greater than MIC. At 160 lbs., MIC is negative, so money is being lost by adding additional fertilizer.

30. How much fertilizer should he apply per acre if he fertilizes the entire field based on Soil Type B?
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
170 lbs. b/c MRP is still greater than MIC and MIC is still positive.

31. Point of Maximum Profit
Point of Maximum Production
When net economic returns are at their greatest point
Point of Maximum Profit is when MIC = MRP
Maximum profit always occurs at a point of production that is lower than maximum production
When production is at its highest possible level

32. What are the farmer’s net returns above fertilizer cost for the entire field if he fertilizes the entire field based on Soil A?
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP -MIC
Soil B
MRP - MIC
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815

33. 150 lbs. x 80 acres = 12,000 lbs. x $0.55/lb. = total cost of $6,600
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
150 lbs. x 80 acres = 12,000 lbs. x $0.55/lb. = total cost of $6,600
130 (Soil A bu/ac) x 50 acres of Soil A = 6500 bu
158 (Soil B bu/ac at 150 lbs/ac fert.) x 30 acres of Soil B = 4740 bu
6500 bu bu = 11,240 total bushels x $5.00/bu = $56,200
$56,200 – total cost of $6,600 = net returns of $49,600

34. What are the farmer’s net returns above fertilizer cost for the entire field if he fertilizes the entire field based on Soil A?
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
$49,600

35. What are the farmer’s net returns above fertilizer cost for the entire field if he fertilizes the entire field based on Soil B?
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815

36. 170 lbs. x 80 acres = 13,600 lbs. x $0.55/lb. = total cost of $7,480
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
MRP -MIC
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
170 lbs. x 80 acres = 13,600 lbs. x $0.55/lb. = total cost of $7,480
132 (Soil A bu/ac at 170 lbs/ac fert.) x 50 acres of Soil A = 6600 bu
163 (Soil B bu/ac) x 30 acres of Soil B = 4890 bu
6600 bu bu = 11,490 total bushels x $5.00/bu = $57,450
$57,450 - total cost of $7,480 = net returns of $49,970

37. What are the farmer’s net returns above fertilizer cost for the entire field if he fertilizes the entire field based on Soil B?
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MIC - MRP
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
$49,970

38. What are his net returns above fertilizer cost for the entire field if he applies 160 pounds per acres on all 100 acres?
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
160 lbs. x 80 acres = 12,800 lbs. x $0.55/lb. = total cost of $7,040
131 (Soil A bu/ac) x 50 acres of Soil A = 6550 bu
161 (Soil B bu/ac) x 30 acres of Soil B = 4830 bu
6550 bu bu = 11,380 total bushels x $5.00/bu = $56,900
$56,900 – total cost of $7,040 = net returns of $49,860

39. What are his net returns above fertilizer cost for the entire field if he fertilizes by applying the profit maximizing amount on each soil type?
Fertilizer
lbs/acre MI
MIC
Soil A
bu/ac MP TR
MRP
MRP - MIC
Soil B
120
xxx
$600
140
$700
130 10
$5.50
125 5
$625
$25
$19.50
148 8
$740
$40
$34.50
128 3
$640
$15
$9.50
154 6
$770
$30
$24.50
150 2
$650
$10
$4.50
158 4
$790
$20
$14.50
160
131 1
$655 $5
$-0.50
161
$805
170
132
$660
163
$815
150 lbs. x 50 acres of Soil A = 7,500 lbs.
170 lbs. x 30 acres of Soil B = 5,100 lbs.
7,500 lbs. + 5,100 lbs. = 12,600 total lbs. x $0.55/lb. = total cost of $6,930
130 (Soil A bu/ac) x 50 acres of Soil A = 6500 bu
163 (Soil B bu/ac) x 30 acres of Soil B = 4890 bu
6500 bu bu = 11,390 total bushels x $5.00/bu = $56,950
$56,950 – total cost of $6,930 = net returns of $50,020

40. Conclusion
After a certain point, the economic returns for each successive unit of variable resource added to a unit of fixed resource tend to decline.
However, one should continue adding inputs as longs as MRP>MIC.
In order to receive maximum profit, expand production until MIC = MRC.

41. Exit Cards What did you learn today about diminishing returns?
What questions do you still have about diminishing returns?