Diminishing returns

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Find sources: "Diminishing returns" – news · newspapers · books · scholar · JSTOR (August 2011) (Learn how and when to remove this message)

Part of a series on
Economics
History Outline Index
Branches and classifications Applied Econometrics Heterodox International Micro / Macro Mainstream Mathematical Methodology Political JEL classification codes
Concepts, theory and techniques Economic systems Economic growth Market National accounting Experimental economics Computational economics Game theory Operations research Middle income trap Industrial complex
By application Agricultural Behavioral Business Cultural Democracy Demographic Development Digitization Ecological Education Engineering Environmental Evolutionary Expeditionary Feminist Financial Geographical Happiness Health Historical Humanistic Industrial organization Information Institutional Knowledge Labour Law Managerial Monetary Natural resource Organizational Participation Personnel Planning Policy Public Public choice / Social choice theory Regional Rural Service Socio Sociological Solidarity Statistics Urban Welfare
Notable economists de Mandeville Quesnay Smith Malthus Say Ricardo von Thünen List Bastiat Cournot Mill Gossen Marx Walras Jevons George Menger Marshall Edgeworth Clark Pareto von Böhm-Bawerk von Wieser Veblen Fisher Pigou Heckscher von Mises Schumpeter Keynes Knight Polanyi Frisch Sraffa Myrdal Hayek Kalecki Röpke Kuznets Tinbergen Robinson von Neumann Hicks Lange Leontief Galbraith Koopmans Schumacher Friedman Samuelson Simon Buchanan Arrow Baumol Solow Rothbard Greenspan Sowell Becker Ostrom Sen Lucas Stiglitz Thaler Hoppe Krugman Piketty more
Lists Glossary Economists Publications (journals) Schools
Business portal Money portal
v t e

In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal (ceteris paribus).^[1] The law of diminishing returns (also known as the law of diminishing marginal productivity) states that in productive processes, increasing a factor of production by one unit, while holding all other production factors constant, will at some point return a lower unit of output per incremental unit of input.^[2][3] The law of diminishing returns does not cause a decrease in overall production capabilities, rather it defines a point on a production curve whereby producing an additional unit of output will result in a loss and is known as negative returns. Under diminishing returns, output remains positive, but productivity and efficiency decrease.

The modern understanding of the law adds the dimension of holding other outputs equal, since a given process is understood to be able to produce co-products.^[4] An example would be a factory increasing its saleable product, but also increasing its CO₂ production, for the same input increase.^[2] The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory.^[5]

The concept of diminishing returns can be explained by considering other theories such as the concept of exponential growth.^[6] It is commonly understood that growth will not continue to rise exponentially, rather it is subject to different forms of constraints such as limited availability of resources and capitalisation which can cause economic stagnation.^[7] This example of production holds true to this common understanding as production is subject to the four factors of production which are land, labour, capital and enterprise.^[8] These factors have the ability to influence economic growth and can eventually limit or inhibit continuous exponential growth.^[9] Therefore, as a result of these constraints the production process will eventually reach a point of maximum yield on the production curve and this is where marginal output will stagnate and move towards zero.^[10] Innovation in the form of technological advances or managerial progress can minimise or eliminate diminishing returns to restore productivity and efficiency and to generate profit.^[11]

This idea can be understood outside of economics theory, for example, population. The population size on Earth is growing rapidly, but this will not continue forever (exponentially). Constraints such as resources will see the population growth stagnate at some point and begin to decline.^[6] Similarly, it will begin to decline towards zero but not actually become a negative value, the same idea as in the diminishing rate of return inevitable to the production process.