Law of Diminishing Marginal Returns: Definition, Example, Use in Economics

The law of diminishing marginal returns states that as you increase the amount of one input into production, while holding all other inputs constant, the marginal (additional) output will eventually decrease. In other words, there is a point at which the additional benefit of adding more of one input will be outweighed by the additional cost.

This law is often used to explain why it is not always profitable to produce more of a good or service. For example, if a farmer adds more fertilizer to his field, he will eventually reach a point where the additional yield from the fertilizer is not worth the cost of the fertilizer.

The law of diminishing marginal returns can also be used to explain why some businesses experience decreasing profits as they grow. As a business grows, it may need to hire more workers, rent more space, and purchase more equipment. However, the additional output from these additional inputs may not be enough to offset the additional costs.

The law of diminishing marginal returns is a fundamental principle of economics. It can be used to explain a wide variety of economic phenomena, from the production of goods and services to the growth of businesses.

Here is an example of the law of diminishing marginal returns in action. A farmer has a field of 100 acres. He plants 100 acres of corn and harvests 100 bushels of corn. He then plants 110 acres of corn and harvests 110 bushels of corn. However, when he plants 120 acres of corn, he only harvests 121 bushels of corn. This is because the additional 10 acres of corn did not produce enough additional output to offset the additional cost of planting and harvesting the corn.

The law of diminishing marginal returns can also be used to explain why some businesses experience decreasing profits as they grow. As a business grows, it may need to hire more workers, rent more space, and purchase more equipment. However, the additional output from these additional inputs may not be enough to offset the additional costs. This can lead to a situation where the business is making less money per unit of output, even though it is producing more output overall.

The law of diminishing marginal returns is a important concept in economics. It can be used to explain a wide variety of economic phenomena, from the production of goods and services to the growth of businesses.