What is the law of diminishing marginal returns?
The law of diminishing marginal yields stipulates that at some point the addition of an additional factor of production leads to a smaller increase in production. For example, a factory employs workers to manufacture its products and, at some point, the business operates at an optimal level. With other constant factors of production, adding more workers beyond this optimal level will result in less efficient operations.
Law of the decrease of marginal yields
Understand the law of diminishing marginal returns
The law of decreasing marginal returns is also known as the law of decreasing returns, the principle of decreasing marginal productivity and the law of varying proportions. This law states that the addition of a larger production factor, all other things being equal, inevitably leads to a decrease in incremental yields per unit. The law does not imply that the additional unit decreases total production, known as negative yields; however, this is usually the result.
The law of diminishing marginal returns does not imply that the additional unit decreases the total output, but it is generally the result.
The law of diminishing returns is not only a fundamental principle of economics, but it also plays a leading role in the theory of production. Production theory is the study of the economic process of converting inputs into outputs.
Key points to remember
- The law of diminishing marginal yields stipulates that the addition of an additional factor of production results in a smaller increase in production.
- The addition of a larger production factor inevitably leads to a decrease in incremental yields per unit, by law.
- The law of decreasing marginal returns is also known as the law of decreasing returns, the principle of decreasing marginal productivity and the law of varying proportions.
The idea of diminishing returns has ties to some of the world’s leading economists, including Jacques Turgot, Johann Heinrich von Thünen, Thomas Robert Malthus, David Ricardo and James Steuart. The first recorded expression of diminishing returns came from Turgot in the mid-1700s. Classical economists, such as Ricardo and Malthus, attribute a successive decrease in production to a decrease in the quality of inputs. Ricardo contributed to the drafting of the law, calling it a “margin for intensive cultivation”.
He was the first to demonstrate how the additional labor and capital added to a fixed parcel of land would successively generate smaller increases in production. Malthus introduced the idea when building his population theory. This theory maintains that the population grows geometrically while food production increases arithmetically, resulting in a population exceeding its food supply. Malthus’ ideas about limited food production stem from diminishing returns.
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 more units of labor are added to a fixed amount of capital.