What is the Law of Diminishing Returns?

Introduction

The Law of Diminishing Returns states that as you continue increasing one factor of production (e.g., labor, capital) while keeping others constant, the additional output (returns) will eventually decrease.

Understanding the Concept

Initially, adding more resources increases production efficiently, but after a certain point, each additional unit contributes less output, leading to lower efficiency.

Real-Life Example

👩‍🍳 Restaurant Kitchen:

• If a restaurant has one chef, adding another improves efficiency.
• Adding a third and fourth chef may further help.
• However, if too many chefs work in the same kitchen, they will get in each other's way, reducing productivity.

Key Stages of Diminishing Returns

1️⃣ Increasing Returns – More input leads to higher efficiency.
2️⃣ Diminishing Returns – Additional input increases output at a slower rate.
3️⃣ Negative Returns – Too much input causes output to decline.

Example in Business

🏭 Manufacturing: Adding more workers to a factory boosts production until space and machinery become overcrowded, slowing efficiency.

💰 Marketing: Spending more on ads initially increases sales, but beyond a point, ROI decreases as the market gets saturated.

Formula Representation

If Q is output and L is labor:

• At first: ΔQ/ΔL increases (more output per worker).
• Eventually: ΔQ/ΔL decreases (each worker adds less output).

How to Avoid Diminishing Returns?

✅ Optimize Resource Allocation – Balance labor, capital, and space.
✅ Use Automation & Technology – Increase efficiency without overcrowding.
✅ Monitor Productivity – Identify the optimal level of resource usage.

Conclusion

The Law of Diminishing Returns highlights the limits of growth when increasing one resource without balancing others. Businesses must optimize inputs to maximize efficiency and profitability. 📉⚖️