Law of Diminishing Returns

Significance of The Law of Diminishing Returns

The law of diminishing returns is a classic economic concept that states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. To continue to make an investment after a certain point (which varies from context to context) is to receive a decreasing return on that input. The Law of Diminishing Returns is a key one in economics. It is a central tent of economics. It means that while the input in a particular economic process will increase the output of the process, after a specific point the growth in output will begin to decline. It is used to explain many of the ways the economy works and changes. It is a relatively simple idea, spending and investing more and more in a product where one of the factors of production remains the same means the enterprise eventually run out of steam.

In economics, the Law of Diminishing Returns appears in the topic dealing with costs. Where any additional worker or variable input added in to the production process will lead to a fall in the quantity produced, in the short run or when at least one factor of production is fixed. The importance of diminishing returns is to allow individuals to understand that there is a stage or point where returns and benefits of doing something. This economic law can serve management and decision makers in enterprise by giving it the framework necessary to logically determining the right balance of business, labor or technological input to an enterprise as compared with the limitations of fixed resources. The Law of Diminishing Returns is a generalization of an observation from economics that increasing one input into an economic process while holding the other factors constant, will produce smaller and smaller improvements in the output. The advantages of applying the law are that it will help avoid a misapplication of resources. According to the...