Law of Diminishing Returns

This law states that, in a production context, the output of the process will marginally decrease with an incrementally increased single factor while all other factors remain constant. One example of this is, hiring new employees to a production pant while keeping the machines and floor area constant. Initially the outputs are increase but after a certain point it will begin to stabilize. The limit won’t be the number of employees but rather other factors. In a way, the law also sates that in most production and economic processes there is always an optimal point. And as soon as that is passed the returns begin to fall. From a business point of view, it is key to understand what parts of the business process are closer to that stable point and what factors can be improved.

Subscribe to Thinkwist

Don’t miss out on the latest issues. Sign up now to get access to the library of members-only issues.