The law of diminishing returns states

What is the law of diminishing returns ?

The law of diminishing returns states that as additional units of a variable input are added to fixed inputs, the marginal product of the variable input declines after a certain point.

This observation was first made by the British economist David Ricardo in the context of agriculture in nineteenth-century England, where successive doses of labor and capital yielded smaller increases in crop output. 

Diminishing returns also apply to manufacturing when a firm starts to exceed the capacity of its existing plant.

Example of crop yield for  the law of diminishing

Let's say a farmer has a fixed amount of land, let's say one acre, and they want to grow corn. They start by planting 100 seeds, and with the help of a fixed amount of fertilizer and water, they get a yield of 100 bushels of corn.

If the farmer decides to increase the number of seeds planted to 200, they might see a corresponding increase in yield to, say, 180 bushels. However, if they keep increasing the number of seeds without increasing the amount of fertilizer or water, they will eventually reach a point where adding more seeds actually decreases the yield of corn per plant. This is the point of diminishing returns, where the additional seeds no longer contribute to a proportional increase in crop yield.

Similarly, in manufacturing, if a company adds more workers to a production line without upgrading the equipment or increasing the space available, they will eventually reach a point where adding more workers actually reduces overall efficiency and output, leading to diminishing returns.

• Average product is the average amount produced by each unit of a variable factor of production, such as labor.
• The average product of labor is calculated by dividing the total output produced by the number of units of labor used.
• In the example of the sandwich shop, the average product of the first two workers is 12.5 sandwiches per hour, calculated by dividing the total output of 25 sandwiches by the number of workers, which is 2.

• Marginal product is the additional output produced by adding one more unit of a variable factor of production, such as labor.
• In the same example of the sandwich shop, the marginal product of the third worker is 10 sandwiches per hour, which is the additional output produced by adding one more worker.
• The law of diminishing returns suggests that as more units of a variable factor of production are added to a fixed amount of capital, the marginal product of the variable factor will eventually decrease.