What is Law of diminishing returns?
Also known as: diminishing marginal returns
If we increase one factor of production (for example, the number of workers) while keeping the others (equipment, floor space) unchanged, then beyond a certain point each additional unit gives less additional output than the previous one. The law is also called the principle of diminishing marginal productivity. An important distinction: diminishing returns do not mean that total output falls; it still grows, only more slowly. If total output starts to fall, that is the "negative returns" stage. The law applies to the short run, because in the long run all factors, including equipment, can be increased. Its practical meaning: before adding staff, identify where the limiting factor (oven, machine, space) is.