This research examines the economic law of diminishing returns. Both the development of the concept and the modern refinements to the concept are covered.
Defining the Law of Diminishing Returns
The hypothesis underlying the law of diminishing returns is that: if one factor of production is increased by small, constant amounts while all other factor quantities are held constant, then after some point the resulting increases in output become smaller and smaller. Before this point is reached output may increase by either constant amounts or by increasing amounts. The assumption of this law is that the units of the variable factor are identical, and that technological knowledge does not change. As the law of diminishing returns assumes at least one fixed factor, the hypothesis relates to short-term outcomes.
To illustrate the functioning of the law of diminishing returns, consider the example of a soft drink bottling facility. Assume that the facility has three bottling and capping systems, and that the output from these systems must be handled by human labor to remove the output from the production area, store the output in a holding area, and load the output for shipment to customers. If one person is required to operate each of the bottling and capping systems, additional human labor is required to handle the output unless the system is shut down while the system operator handles the output. Thus, retaining the fixed number of bottling and capping machines while adding human labor to handle the system output will lead to improved efficiency of operation·up to a point. At some point, however, the addition of one more human worker to handle the system output will result in an efficiency improvement than is smaller than the improvement associated with the addition of the immediately preceding worker. Finally, the addition of one more human worker may actually result in a decrease in output as workers begin to get in t...