The Law Of Diminishing Returns

The Law of Diminishing Returns

The law of diminishing returns states that in production processes, adding more of one factor of production, while keeping all other factors constant will at some point result in smaller per unit incremental returns.  Basically, the extra output obtained by increasing one input, while the other inputs are constant, decreases over time.

 

About the Law of Diminishing Returns

Law of diminishing returns, also referred to as the law of diminishing marginal returns, is a concept in economics that if one factor of production (e.g. number of workers) is increased while other factors (e.g. work area or equipment) are held constant, the output per unit of the variable factor will eventually diminish.  In other words, keeping all other factors constant, the additional output gained by another one unit increase of the input variable will eventually be smaller than the additional output gained by the previous increase in input variable.  That is the point at which the diminishing marginal returns take effect.

Example

If a farmer, who owns a 50 acres, hires 20 workers to harvest the fields, the farmer may see significant yields per worker.  If he or she goes and hires 5 more workers, they will probably see an increase in production, but they may not get the same amount of production from the additional workers as they did for the first 20 workers.  This is because not every unit of input will lead to a proportional increase of output.  

The marginal productivity of the workforce decreases as output increases.  Therefore, if more and more workers are added to harvest the fields, at some point each additional worker will add proportionally less output than the previous one did.  This is because the workers have less and less of the fixed amount of land to work with.

With each additional worker, the combination of land and workers would be less efficient because the proportional increase in the overall output would be less than the increase in the workforce.  Therefore, the output per worker would be less.

 

Negative Returns

The law of diminishing returns does not state that adding more of a factor will decrease the total production, rather is suggests the margins will continue to decrease.  However, there comes a point where there are negative returns.  This is when the number of workers exceeds the available field space. 

 

 

Graphic  of Law of Diminishing Returns

Total Input = Time, effort, and resources invested

Total Output = Overall quality of work and work produced

 

Most Productive

Increased input leads to productive returns.  It pays to input more time and effort at this stage.

 

Diminishing Returns

Each added unit of input leads to a decreasing level of output.  It is best to stop inputting resources during this stage. 

 

Negative Returns

There is no return for time and effort at this stage and output actually decreases. 

Additional Links

Autonomy Improves Performance

Performance Management Cycle

Employee Performance Goals

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