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Some of the popular definitions of marginal productivity theory are as follows:
In the words of J.B. Clark, “Under static conditions, every factor including entrepreneur would get a remuneration equal to marginal product.” As per Mark Blaug, “The marginal productivity theory contends that in equilibrium each productive agent will be rewarded in accordance with its marginal productivity.”
When an organization increases one unit of a factor of production (while keeping the other factors constant), the marginal productivity increases to a certain level of production. After reaching a certain level, the marginal productivity starts declining. This is because when an organization keeps on increasing the amount of a particular factor of production, the marginal cost also increases.
After reaching a certain point, the marginal cost exceeds marginal revenue, thus the marginal productivity declines. On the other hand, if the marginal revenue is greater than marginal cost, the organization opts for employing an additional unit of factor of production.
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