After increasing temporarily for some time the marginal product of labour eventually decreases. In general, with continuous increase in the variable factor labour, its marginal product will increase initially till certain point is reached, but after that it will decrease and may become negative, keeping all other factors unchanged. This is popularly known as the Law of diminishing Marginal Product of labour.

Assume that there are two factors of production, Labour and Capital, where capital is in the form of a machine. Say that labour is the variable factor which can be increased to increase output and capital is the fixed factor which is kept constant. In the beginning only 1 labourer is working. May be one labourer is not sufficient to use the machine efficiently. So the unit of labour is increased to 2 and then to 3.

Initially when we increase labour, it becomes fruitful because the labourers can handle different works as per their efficiency and choice. So. output of the extra unit of labour increases. But there is a limit to which labour can be increased because then we may require another machine. But machine is a fixed factor and cannot be increased or decreased. So as a result of increasing the variable factor labour only, machine gets over used. Also, the work of a machine cannot be done by the labourers that were added. So, the output of each of the extra unit of labour i.e. MP of labour beyond a point starts decreasing.

To what extent can the variable factor be increased or employed?

Increase in the variable factor should take place till the point where its marginal product becomes minimum and stop employing further before the marginal product becomes negative.