The Law of Diminishing Returns

What is the Law of Diminishing Returns?

Diminishing returns is also known as the law of Diminishing Returns. The law of diminishing marginal productivity states the law of Diminishing Returns. The law of Diminishing Returns occurs when there is a decrease in the marginal output of the production process as a consequence of an increase in the amount of a single factor of production, while the amounts of other parameters of production remain constant. The theories of production describe the law of Diminishing Returns as a fundamental principle of economics.


According to the law of diminishing marginal returns, counting an additional factor of production results in outcomes of small growth. After some ideal level of volume is achieved, the adding of any bigger amounts of a factor of production will only yield reduced per-unit incremental returns.


The law of Diminishing Returns is quickly applicable in the fields of agriculture, mining, forests, fisheries and building industries.


Definition of Law of Diminishing Returns

As per economists, the law of Diminishing Returns is the phenomenon when more and more units of a changing input are to be used. On a given quantity of fixed data, the total output may initially increase at an increasing rate and then at a constant rate. The fact that It will eventually increase at a decreasing rate explains the law of Diminishing Returns.

Various economists have defined the law of Diminishing Returns.

When the total output initially increases with an increase in changing input at a given quantity of fixed data, but it starts decreasing after a point of time, illustrates the law of Diminishing Returns.

The significance of the law of Diminishing Returns can be understood by referring to the theory of production.

To properly illustrate the law of Diminishing Returns, some examples are given in this article


The law of Diminishing Returns owes its origin to the efforts of early economists such as James Steuart, David Ricardo, Jacques Turgot, Adam Smith, Johann Heinrich von and Thomas Robart Malthus. These economists propounded the definition of the law of Diminishing Returns.


An example to further illustrate the law of Diminishing Returns: Let’s take an example of a firm that has a set stock of tools and machines, and an uneven supply of labour. As the number of workers increases in the firm, the total output of the firm rises, but at an ever-decreasing rate. It is due to this reason that after a certain point, the firm gets overcrowded and workers start to form lines to use the machines. The permanent solution to this problem is to increase the stock of capital, buy more machinery and build more firms. The above-provided example discusses the law of Diminishing Returns.


Significance of the Law of Diminishing Returns

The law of Diminishing Returns states that the result of adding a factor of production is a smaller increase in output. The addition of any amount of a factor of production, after some best possible level of capacity utilization, will inevitably capitulate decreased per-unit incremental returns. Various factors can be given to illustrate the law of Diminishing Returns.


There are many significant laws of Diminishing Returns. In mathematics, the optimization theory explains the law of diminishing returns as equivalent to a second-order condition. This theory makes perfect sense in economics.


Let us take an example to illustrate the law of diminishing returns. Suppose that the profits of a given company do not decrease with higher levels of production, it could mean that the company would decide to produce an infinite amount of their product for the same Infinitum benefit and returns. Like this, there can be various scenarios for a better understanding of the definition of the law of Diminishing Returns.

The Theory of Production explains the Law of Diminishing Returns

The significance of the law of Diminishing Returns can help in the formulation of various economic policies, to explain the tax difference in the income of different classes


In short, the Law of Diminishing Returns is a perfect phenomenon for the maximization of profit. Failing to prove this second-order condition will mean that the person is minimizing the returns, instead of maximizing them.


The law of Diminishing Returns states that in a production process with which all other factors are fixed except one if the quantity of the variable factor increases by a fixed rate, the level of production will increase by a decreasing rate.


Assumptions

The definition of the law of Diminishing Returns gives some assumptions, which are as follows-

  • Homogeneous variable factors

  • The measurement of output

  • The law of Diminishing Returns states that this law applies only when there is no change.

The law of the Diminishing Returns indicates the following factors:

  • Fixed factors of production

  • Scarce factors

  • Lack of perfect alternatives

  • Optimum production

The above-mentioned operation shows the significance of the law of Diminishing Returns.


Did you Know?

Historically, economists were worried that Diminishing Returns would lead to global misery and the gradual ending of human civilization. They saw the application of Diminishing Returns to farmland and observed that at a fixed point any given acre of land has an optimal result of food output per employee.


Economists have for a long time defined the law of diminishing marginal returns roughly and incompatibly. To economists of today’s times, diminishing returns occur only and only when a marginal product goes down at a growing rate of a variable homogeneous input. But economists of earlier times have always confused short-run and long-run returns, average and marginal returns, homogeneous and heterogeneous inputs, and much more. The law of diminishing returns is rooted back in the 18th century and has evolved ever since.

FAQs on The Law of Diminishing Returns

1. What do you Mean by Optimal Results? Explain with Examples?

The law of Diminishing Returns is based on the concept of an optimal result. It is the theme that on a fixed point, all productive elements of a system are working at peak effectiveness. You cannot get any more effectiveness because everything and everyone is working at 100%. A system of production has three stages near the optimal result:

  1. Below optimal 

  2. Optimal 

  3. Diminishing marginal productivity

Examples: The store is overstaffed. Employees have become less efficient. Per new employee increases the employee-to-consumer ratio. There is no use for additional employees. So we can now expand the store to get more consumers.

2. Whether there are any Exceptions to the Diminishing Marginal Productivity? State Reasons?

Yes, there are some exceptions to the law of diminishing marginal productivity, which is as follows:

  • This principle is true only for uniform units of a commodity, which are the same in shape, size, length, etc.

  • This principle applies only in cases where the consumer doesn't change his preferences, and the manner of the commodity remains the same, which hardly is the case.

  • This principle does not apply to habitual goods of consumption like drugs, alcohol, etc.

For example, if any person has a hobby to collect stamps, then the marginal utility resulting from gathering one more unit of the stamp will rise.

3. What is the essence of the Law of Diminishing Returns?

Law Of Diminishing Returns says that as one variable input is gained, with all other factor inputs being fixed, a point will come after which the marginal physical product of the variable factor will start to go down.  Yet, if additional variable input is counted in, it will lead to negative marginal production eventually.


For instance, if a factory employs workers for the production of its products, at a given point, the company will work at an optimal level; with the rest of the production factors being constant, employing additional workers after this optimal level will only make the product less efficient as the size of the factory and machinery is not increasing and you are simply stuffing more people resulting in the chaos which will decrease efficiency.

4. What period is the Law of Diminishing Returns of factors relevant to?

At any given time, engaging an added factor of production consequences in a comparatively smaller overall growth in output. Thus, this law is only pertinent in a short period.

  • Diminishing returns happen in the short run while one of the factors remain fixed (e.g. capital)

  • If there is an increase in the variable factor of production (e.g. labour), there comes a point in time where it will get less productive, and consequently there will eventually be a declining marginal and then average product.

  • This is for the reason that, if capital is fixed, extra workers will sooner or later get in each other's way as they try to increase production.

5. What are the examples of Diminishing Marginal Returns?

These are some of the common examples of Diminishing Marginal Returns:

1. Farms: Farms can be a typical example of Diminishing Marginal Returns, as they have a precise acreage to harvest. Let’s assume there are 75 acres and each employee can cover 25 acres each. Only 3 farmers are needed, so beyond 3 farmers will result in Diminishing Returns.

This can also be considered in the case of the use of fertilizer on a farm. Too much fertilizer can start to harm the crops on the farm, whilst it being not less nor more can help increase productivity. 


2. Education: In Education, students have to be present for about 5 to 6 hours in a classroom. Others may as well be awake for 2 to 3 more hours at night for revision. However, there is a certain point where the students will not be able to take in any more amounts of knowledge.


At a certain point, we all become uninterested or detached from a topic or subject that we have been going through for a long time. After this point, we are driven only by motivation and will. That is not essentially the most fruitful way to learn and will yield Diminishing Marginal Returns in the amount of data we take in.


3. Coffee House: The Coffee House case shows how too many staffs can cause misperception and create incompetence. For instance, 3 baristas may be employed at the coffee shop. They can professionally serve customers. When another worker is added, there may be issues that start to arise, or they may have a hard time getting along. Two baristas may make the same order without realizing it.


To make this case to the extreme level; imagine 80 workers crowded into your local coffee shop. As you can imagine, it would be a big clutter. At a given point of time, adding another worker will start to cut the effectiveness of the operation.

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