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. 

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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.

Related Topics

• Law of Diminishing Marginal Returns
• Marginal Analysis
• Short Run
• Long-Run Average Cost (LRAC)
• Long-Run Average Supply (LRAS)
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Tournament Theory
• Marginal Revenue Product 
• Derived Demand
• Marginal Input Cost  
• Economic Rent
• Productivity and Learning Curve
• Experience Curve
• Acceleration Principle