What is the Law of Diminishing Marginal Returns?

The decrease in a production process marginal output, as a single input factor rises while other input factors remain constant, is called the Law of Diminishing Marginal Returns in economic parlance. As a single input parameter rises incrementally in the production of a commodity, over time the returns will diminish with less and less output. 

Illustration of the Law of Diminishing Marginal Returns

Lets look at the principle of diminishing returns with an example:Suppose a woodworks shop has 10 Lathe machines, 10 Hand Planes, and 20 workers. Increasing the number of Lathe machines to 15 might increase production by a small margin as the number of workers and Hand Planes remains the same. Add 5 more lathe machines to this scenario and the marginal production capacity would yield the same magnitude of output since workers cant work on both tools at the same time. Thus, increasing one input factor constantly while others remain the same, results in diminishing returns. 

Some other examples that testify to the Law of Diminishing Marginal Returns are:

1. Increasing the number of baristas to serve more customers while the seating capacity of the coffee house and its inventory remain constant, will only increase operational costs without adding extra coppers to the coffer.
2. Fertilizer usage on crops yields good results when employed in moderation. Increased usage does not result in extra crops but renders the yield toxic and useless - a classic case of negative marginal returns. 

Production inputs work in tandem with each other, random increase in a single input does not favor the output. Input factors need to turn variable in accordance with each other. More baristas to be employed when seating capacity increases. More fertilizers to be used when more acres of crops need to be fertilized. Increasing a single input variable is the quickest route to decreasing output value.

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns