Diminishing Marginal Returns

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Definition: Diminishing Marginal Returns

The law of diminishing marginal returns is used to explain economic concepts, and is one of the laws used in the explanation of production theory. It states that beyond a certain point, as one of the inputs is increased, the marginal or the incremental increase in the output begins to decrease, provided that all the other variable factors are kept constant. This law is also called the law of diminishing returns.

This law can be used in various places such as factories to understand the total number of workers in order to obtain maximum efficiency, i.e., to obtain the maximum output per person. Thus the ideal value of the number of workers can be estimated.

For example, consider a factory producing clothes. Suppose that, when there were 20 people working in the factory, the total output was 1000 clothes per month, i.e., the output per person equals 50 clothes per month. Now, if a new worker is added, i.e., a total of 101 workers, and the total output now becomes 1010 clothes per month, the output per person per month becomes 1010/21 = 48. Thus, we see that the marginal returns decreased from 50 to 48. This is an illustration of diminishing marginal returns.



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