Can You Explain The Law Of Diminishing Returns?

The law of diminishing returns is simply common sense which most of us will understand even without reading about it in any economics course. It simply states that 'when you apply fixed and variable inputs beyond a point or limit, the out come will be less and less utility with each additional unit'.

Let us try to understand that there is a one acre land used for producing grapes and the fixed variables like land is fixed and the labour is the variable input which can change. If 3tons can be produced with 3 labours, then if you apply more labours on fixed land then the out come will ill less than satisfactory. As applying more labours will mean more costs and then to make those cost equal one will have to produce twice and that will have dire consequences on land and its fertility.

This is just an example in simple words but the concept which was traced back to the concerns of early economists such as Johann Heinrich , Turgot, Thomas Malthus and David Ricardo. Malthus and Ricardo, were worried that in order to increase output from agriculture, farmers would have to farm less fertile land or farm existing land with more intensive production methods. One can find more information in many books of economics as well on the internet.

         The world of business has a number of complex calculations and operations involved in day-to-day functions. There are a number of factors that affect the operations within a business. All the operations are inter-connected and dependent on one another.

        The removal or addition to one of the resources within each of the operations affects all the other processes involved. This inter-dependency, in a way, is responsible for the integrity within the business functions.

        The Law of Diminishing Returns was written by a Frenchman Anne Robert Jacques Turgot and further added to by Thomas Malthus. The Law of Diminishing Returns states that when one of the many factors of production is fixed in supply for a pre-determined period of time, successive additions to the quantities of the other factors or to the factors themselves will initially lead to the desired increase in returns and profit up to a certain point.

        But, beyond that point, the returns will diminish. This springs from the fact that the addition was not uniformly applied to all the factors and since their inter-dependency was affected, the returns were too. The Law of Diminishing Returns is applicable to any business and has always proved true. It advocates uniformity in application to all the processes and factors involved in a business.

The law of diminishing returns  actually implies eventual diminishing marginal productivity to a variable factor. Since it receives less and less fixed factor per unit  to work with, after the ideal factor proportionality is reached,  the result will be diminishing returns.