(i) Decrease in level of efficiency : If we increase the units of variable factors too much with fixed factors of production (after optimum combination), then the factor proportion becomes more and more worse. Due to that efficiency of both the factors decreases (because we are moving away from ideal combination). That's why AP and MP both decreases. Due to that AC and MC both increases.
(ii) Imperfect substitute: At the point of optimum combination of means of production average and marginal productivity can be increased by substituting fixed factor (because at this point fixed factor is completely utilised). But the factors of production are not perfect substitutes, therefore it is not possible to replace fixed factor with other factor and that’s why, if we have to increase the output at optimum combination then we have to increase the units of variable factor with the same units of fixed factor. As a result there will be over utilisation of fixed factor, so AP and MP both decreases and AC and MC both increases. So ultimately decreasing returns will applies.
