The 3rd phases of the law starts when the number of a variable, factor becomes, too excessive relative, to the fixed factors, A producer cannot operate in this stage because total production declines with the employment of additional labour.

A rational producer will always seek to produce in stage 2 where MP and AP of the variable factor are diminishing. At which particular point, the producer will decide to produce depends upon the price of the factor he has to pay. The producer Will employ the variable factor (say labour) up to the point where the marginal product of the labour equals the given wage rate in the labour market.