What Are The Three Stages Of Classical Production Function?

The three stages of classical production function are increasing returns, diminishing returns and negative returns.

The first stage, increasing returns, occurs when a firm increases the amount of labor or capital into its production, increasing productivity. As the product increases, so the marginal product increases and overall output increases. If plotted on a graph, the product would be seen as a positive curve.

Diminishing returns (sometimes called declining returns) happens when labor increases, but individual productivity decreases. With more workers, there is slightly less for each to do, for the same same amount of output. The positive curve begins to flatten out (This is were the phrase 'the law of diminishing returns' comes from).

The final stage, negative returns, see us get less out than we put in. Output and marginal product both decline, no matter how much extra labor and capital are invested. It is as if you've crammed a factory with so many employees in order to increase productivity, they cannot move and so their individual productivity declines even while output remains constant or even declines.

To ensure you don't suffer from diminishing returns, brush up on your production theory by watching this YouTube tutorial: