Law of diminishing returns


A concept in economics that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, for example) are held constant, the output per unit of the variable factor will eventually diminish.
Although the marginal productivity of the workforce decreases as output increases, diminishing returns do not mean negative returns until (in this example) the number of workers exceeds the available machines or workspace. If the factory continues to add new workers, it eventually becomes so cramped that additional workers hinder the efficiency of other employees, thereby decreasing the factory’s production.

In everyday experience, this law is expressed as "the gain is not worth the pain." Thus, an increasing number of new employees causes the marginal product of another employee to be smaller than the marginal product of the previous employee at some point.
The point at which the law begins to operate is difficult to ascertain, as it varies with improved production technique and other factors. Anticipated by Anne Robert Jacques Turgot and implied by Thomas Malthus in his Essay on the Principle of Population (1798), the law first came under examination during the discussions in England on free trade and the corn laws.

The law of diminishing returns is not only a fundamental principle of economics but also plays a starring role in production theory. Production theory is the study of the economic process of converting inputs into outputs.


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Thursday, 01st Jan 1970, 12:00:00 AM