Whꦏat Is the Law of Diminishing Marginal Returns?

The law of diminishing marginal returns is an economic concept that explains how, beyond a certain point, increasing one input while keeping others constant will lead to progressively smaller gains 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 澳洲幸运5官方开奖结果体彩网:diminishing marginal utility. It can also be contrasted with 澳洲幸运5官方开奖结果体彩网:economies of scale.

Underst🍷anding the Law of Diminishing Marginꦏal Returns

The law of diminishing marginal returns is also referred to as the "law of diminishing returns," the "principle of diminishing marginal productivity," and the "law of variable proportions." This law affirms that the addition of a larger amount of one factor of production, 澳洲幸运5官方开奖结果体彩网:ceteris paribus, inevitably yields decreased per-unit incremental returns. The law does not imply that the additional unit decreases total production, which is known as 澳洲幸运5官方开奖结果体彩网:negative returns; however, this is commonly the result.

The law of diminishing returns is not only a fundamental principle of economics, but it also plays a starring role in production theory. Production theory is the study of the economic process of converting inputs into outputs. Businesses, analysts, and financial loan providers will 澳洲幸运5官方开奖结果体彩网:🌊calculate the diminishing marginal returns༺ to determine if production growth is beneficial.

History of The Law of Diminishing Returns

The idea of diminishing returns has ties to some of the world’s earliest economists, including Jacques Turgot, Johann Heinrich von Thünen, Thomas Robert Malthus, 澳洲幸运5官方开奖结果体彩网:David Ricardo, and James Anderson. The first recorded mention of diminishing returns came from Turgot in the mid-1700s.

Classical economists, such as Ricardo and Malthus, attribute successive diminishment of output to a decrease in the quality of input. Ricardo contributed to the development of the law, referring to it as the "intensive margin of cultivation." Ricardo was also the first to demonstrate how additional labor and capital added to a fixed piece of land would successively generate smaller output increases.

Malthus introduced the idea during the construction of his population theory. This theory argues that the population grows geometrically while food production increases arithmetically, resulting in a population outgrowing its food supply. Malthus’ ideas about limited food production stem from diminishing returns.

澳洲幸运5官方开奖结果体彩网:Neoclassical economists postulate that each “unit” of labor is exactly the same, and diminishing returns are caused by a disruption of the entire production 🙈process as extra units of labor are added to a set amount of capital.

Diminishin🐼g M𒊎arginal Returns vs. Returns to Scale

Diminishing marginal returns are an effect of increasing input in the short run, while at least one production variable is kept constant, such as labor or capital. Returns to scale, on the other hand, are the impact of increasing input on 𝐆all variables of production in the long run. This phenomenon is referred to as economies of scale.

For example, suppose that there is a manufacturer that is able to double its total input, but gets only a 60% increase in total output; this is an example of decreasing returns to scale. Now, if the sam❀e manufacturer ends up doubling its total output, then it has achieved constant returns to scale, where the increase in output is proportional to the increase in production input. However, economies of scale will occur when the percentage increase in output is higher than the percentage increase in input (so that by doubling inputs, output triples).