In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
Law of Diminishing Marginal Returns
What is the ‘Law of Diminishing Marginal Returns’
The law of diminishing marginal returns is a law of economics that states 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.
Explaining ‘Law of Diminishing Marginal Returns’
The law of diminishing marginal returns goes by a number of different names, including law of diminishing returns, principle of diminishing marginal productivity and law of variable proportions. This law affirms that the addition of a larger amount of one factor of production, while all others remain constant, identified by the Latin term “ceteris paribus,” inevitably yields decreased per-unit incremental returns. The law does not imply the addition of the factor decreases total production, otherwise known as negative returns; however, this commonly happens.
The idea of diminishing returns has ties back to some of the world’s earliest economists including Jacques Turgot, Johann Heinrich von Thünen, Thomas Robert Malthus, David Ricardo and James Steuart.
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.
Law Of Diminishing Marginal Returns FAQ
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