Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Law of Diminishing Marginal Returns Definition
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.
A Little More on What is the Law of Diminishing Marginal Returns
Let’s 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 can’t 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:
- 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.
- 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.
References for Law of Diminishing Marginal Returns
Academic Research Law of Diminishing Returns
The law of diminishing returns, Shephard, R. W., & Färe, R. (1974). The law of diminishing returns. Zeitschrift für Nationalökonomie, 34(1-2), 69-90. This research explains the Law of Diminishing Returns in economic terms with examples from different industry verticals like agriculture, environment, and more.
The strength of g at different levels of ability: Have Detterman and Daniel rediscovered Spearman’s” law of diminishing returns“?, Deary, I. J., & Pagliari, C. (1991). The strength of g at different levels of ability: Have Detterman and Daniel rediscovered Spearman’s” law of diminishing returns”?. The research studies Spearman’s Law of Diminishing Returns and critically reviews the hypothesis of interest correlation to range of ability.
Challenging the Law of diminishing returns‘, Fogarty, G. J., & Stankov, L. (1995). Challenging the Law of diminishing returns’. Intelligence, 21(2), 157-176. This study aims to deconstruct and disprove the Law of Diminishing Returns by analysing data that yields contradicting results across different IQ spectrums.
Use of factor mixture modeling to capture Spearman’s law of diminishing returns, Reynolds, M. R., Keith, T. Z., & Beretvas, S. N. (2010). Use of factor mixture modeling to capture Spearman’s law of diminishing returns. Intelligence, 38(2), 231-241. This study posits that Spearman’s Law of Diminishing Returns does not perform well with subjects in high IQ groups.
Retrospectives: The law of diminishing returns, Brue, S. L. (1993). Retrospectives: The law of diminishing returns. Journal of Economic Perspectives, 7(3), 185-192. This article traces the journey of Spearman’s Law of Diminishing Returns in economic circles, discusses its complexity, criticisms, and more.
Spearman’s Law of Diminishing Returns and national ability, Coyle, T. R., & Rindermann, H. (2013). Spearman’s Law of Diminishing Returns and national ability. Personality and Individual Differences, 55(4), 406-410. This study examines Spearman’s LODR using data from standardized tests.
The origin of the law of diminishing returns, 1813-15, Cannan, E. (1892). The origin of the law of diminishing returns, 1813-15. The Economic Journal, 2(5), 53-69. This article sheds light on the origins of SLODR.
On a Misinterpretation of the Law of Diminishing Returns in Marshall’s Principles, Gordon, H. S. (1952). On a misinterpretation of the law of diminishing returns in Marshall’s Principles. Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique, 18(1), 96-98. The author takes a look at the misapplication of SLODR on the fishing industry.
Joint inputs and the law of diminishing returns, Färe, R., & Jansson, L. (1976). Joint inputs and the law of diminishing returns. Zeitschrift für Nationalökonomie, 36(3-4), 407-416. This paper attempts to explain the LODR in the case of joint inputs.
A law of diminishing returns in organizational behavior, Davis, K. (1975). A law of diminishing returns in organizational behavior. Personnel Journal, 54(12), 616-619. The concept of LODR is explained with respect to employee skills, security, and autonomy.
Remarks on the Law of Diminishing Returns a Study in Meta-Economics, Menger, K. (1979). Remarks on the Law of Diminishing Returns a Study in Meta-Economics. In Selected papers in logic and foundations, didactics, economics (pp. 279-302). Springer, Dordrecht. This paper explains the economic theory of LODMR in mathematical terms.