The Law of Diminishing Returns

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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 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. 

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 the 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 giving in this article

The law of Diminishing Returns owes its origin from 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.

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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, to buy more machinery and to 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 amounts 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 of 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 it.

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.

FAQ (Frequently Asked Questions)

Q1. What do you Mean by Optimal Results? Explain with Examples.

Ans: 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 can not 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 of additional employees. So we can now expand the store to get more consumers.

Q2. Whether there are Any Exceptions to the Diminishing Marginal Productivity? State Reasons.

Ans: 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.