Law of Diminishing Marginal Returns

 What Is the Law of Diminishing Marginal Returns?

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations. 

The law of diminishing returns is related to the concept of diminishing marginal utility. It can also be contrasted with economies of scale.

KEY TAKEAWAYS

The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output. 

After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yield decreased per-unit incremental returns.

For example, if a factory employs workers to manufacture its products, at some point, the company will operate at an optimal level; with all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.