Diminshing Returns

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Diminshing Returns: is the decrease in the marginal output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.

(http://creditmanagementassociation.org/wp-content/uploads/2013/09/law-of-diminishing-returns.jpg)

The diagram shows that up until a the point of diminshing returns varible labour increases output, however at the point of diminshing returns when too much labour is added, output decreases as the business becomes inefficient.

The law of Diminshing Returns:

  • Helps us to understand the shape of the products cost curve.
  • Is a short-run concept which only occurs when a factor of production is fixed (usually…

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