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On Diminishing Returns

14 May, 2022 - 3 min read


The value of each additional input leads to a decreasing level of output. At this stage the effort of productivity decreases.

Doing too much of something may lead to diminishing or negative returns. For example, exercising to a level of exhaustion without giving your body a rest is counterproductive. Another example is giving money to poor family which will help them escape poverty. However, after a certain threshold additional dollar won’t have much impact. Receiving too much money could destroy the poor family.

Definition

Law of diminishing returns, also referred to as the law of diminishing marginal returns, is a concept in economics that if one factor of production (e.g. number of workers) is increased while other factors (e.g. work area or equipment) are held constant, the output per unit of the variable factor will eventually diminish. In other words, keeping all other factors constant, the additional output gained by another one unit increase of the input variable will eventually be smaller than the additional output gained by the previous increase in input variable. That is the point at which the diminishing marginal returns take effect.

Deep analysis

A common example of diminishing returns is choosing to hire more to increase productivity.

A farmer who owns a 25 acres hires 5 workers to harvest the field. Farmer will benefit tremendously per hire. But hiring 5 more will not yield the same level of productivity. This is because not every unit of input will lead to a proportional increase of output. The marginal productivity of the workforce decreases as output increases. Therefore, the total output per hire would be less.

The law of diminishing returns states that simply increasing one input while keeping others the same will at some point yield diminishing returns. Basically, the extra output obtained by increasing one input, while the other inputs are constant, decreases over time.

Assuming you are effectively iterating the product based on customer feedback and research, you will eventually hit a point where there’s just not that much you can do to make it better. It’s time for your team to move on and invest in something new. — Brandon Chu

Income and happiness

Diminishing returns refers to any situation where your marginal benefits (income, happiness) is decreasing as the number of resources (time, inputs) increases. The extra boost of happiness you get from eating out 15th time should be less than the happiness you got from the 10th time.

Negative returns

The law of diminishing return does not state that adding more input will decrease the total production. It rather suggests the margins will continue to decrease eventually leading into negative territory.