Production Theory

Discussion on the abstract for “Diminishing Marginal Returns and the Production of Education: An International Analysis,” by Douglas N. Harris (Education Economics, 2007).

Diminishing Marginal Returns is the decrease in marginal output as the amount of one factor of production is increased, holding all other production factors constant. Adding more of this one factor of production, while holding all other factors constant, will eventually bring about lower per-unit returns.

In the article Diminishing Marginal Returns and the Production of Education: An International Analysis, author Douglas N. Harris researched the effects of increased school inputs on the production of education across 36 countries. Previous studies have shown that increased school inputs such as class size and teacher education play a significant role in the production of education in developing countries and among minorities within developing countries. The goal of this article was to use a new test with functional forms that allow for Diminishing Marginal Returns (DMR). The test concluded that there is little evidence for DMR within countries, and no evidence of DMR in total inputs in the United States, as suggested by other studies. The evidence is more supportive of DMR across countries; however, there is not enough evidence to be able to reject the possibility of constant returns. Previous data has shown the marginal effects of school inputs is frequently negative. However, in those places with positive marginal effects, there is some evidence of DMR. The Heyneman-Loxley hypothesis has suggested that “school inputs are the ‘predominant influence’ on achievement in developing nations.” The article reinterprets the hypothesis and shows that this may no longer be the case by including such variables as school and non-school inputs as well as national income.

The article also examined the differences in the marginal return of school inputs between developed and developing nations. We expected that there would be a significant difference between the two categories of countries. Specifically, we expected that the marginal gains of school inputs would be greater in developing countries than in developed countries. We hypothesised this to be true because of the disparity of resources between the two types of countries. In developed countries, educational systems already have access to inputs such as quality teachers and good facilities, so one would expect that adding more of these items would not yield high marginal returns. However, to the contrary, educational systems in developing countries most likely do not have access to many educational inputs. Thus, when these inputs are added, one would expect the marginal returns to be high due to the influx of new types of resources. Essentially, developed nations are inputting more of what they already have so the marginal gains are not as high, whereas developing nations are putting in place new inputs so the marginal gains are higher. As we expected, the article found this relationship to be true.

Another real-world application of these concepts of Production Theory has to do with adding fertilizer to farms and gardens. This fertilizer will increase crop production, but only to a certain extent. If the farmer or gardener adds more and more fertilizer, at some point, the increase in yield per unit of fertilizer used will begin to decrease. Also, in the case of adding too much fertilizer, total yield could also be affected negatively. For example, if tomatoes are given too much nitrogen, they will grow more leaves, and less tomatoes, decreasing total yield because of the addition of too much fertilizer. This is referred to as negative marginal returns.

Negative Marginal Returns

Posted by George, Phil and Drew (Section 2)



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