Diminishing returns

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.

[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.

[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.

[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.

[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.

The concept of diminishing returns can be traced back to the concerns of early economists such as Johann Heinrich von Thünen, Jacques Turgot, Adam Smith,[12] James Steuart, Thomas Robert Malthus, and [13] David Ricardo.

The law of diminishing returns can be traced back to the 18th century, in the work of Jacques Turgot.

"[14] In 1815, David Ricardo, Thomas Malthus, Edward West, and Robert Torrens applied the concept of diminishing returns to land rent.

These works were relevant to the committees of Parliament in England, who were investigating why grain prices were so high, and how to reduce them.

The four economists concluded that the prices of the products had risen due to the Napoleonic Wars, which affected international trade and caused farmers to move to lands which were undeveloped and further away.

In addition, at the end of the Napoleonic Wars, grain imports were restored which caused a decline in prices because the farmers needed to attract customers and sell their products faster.

Diminishing returns are due to the disruption of the entire production process as additional units of labor are added to a fixed amount of capital.

The law of diminishing returns remains an important consideration in areas of production such as farming and agriculture.

In recent years, economists since the 1970s have sought to redefine the theory to make it more appropriate and relevant in modern economic societies.

In the early 19th century, David Ricardo as well as other English economists previously mentioned, adopted this law as the result of the lived experience in England after the war.

It was developed by observing the relationship between prices of wheat and corn and the quality of the land which yielded the harvests.

Therefore, each additional unit of labour on agricultural fields, actually provided a diminishing or marginally decreasing return.

[17] A common example of diminishing returns is choosing to hire more people on a factory floor to alter current manufacturing and production capabilities.

Further along the production curve at, for example 100 employees, floor space is likely getting crowded, there are too many people operating the machines and in the building, and workers are getting in each other's way.

After achieving the point of maximum output, employing additional workers, this will give negative returns.

Returns eventually diminish because economists measure productivity with regard to additional units (marginal).

Being able to recognize this point is beneficial, as other variables in the production function can be altered rather than continually increasing labor.

Further, examine something such as the Human Development Index, which would presumably continue to rise so long as GDP per capita (in purchasing power parity terms) was increasing.

Even GDP per capita will reach a point where it has a diminishing rate of return on HDI.

Meaning, they can decrease without perceivable impact on output, after the manner of excessive fertiliser on a field.

While considered "hard" inputs, like labour and assets, diminishing returns would hold true.

In the modern accounting era where inputs can be traced back to movements of financial capital, the same case may reflect constant, or increasing returns.

A curve of output against input. The areas of increasing, diminishing and negative returns are identified at points along the curve. There is also a point of maximum yield which is the point on the curve where producing another unit of output becomes inefficient and unproductive.
Figure 2: Output vs. Input [top] & Output per unit Input vs. Input [bottom] Seen in [top], the change in output by increasing input from L 1 to L 2 is equal to the change from L 2 to L 3 . Seen in [bottom], until an input of L 1 , the output per unit is increasing. After L 1 , the output per unit decreases to zero at L 3 . Together, these demonstrate diminishing returns from L 1 .
Figure 2 [OLD]: Total Output vs. Total Input [top] & Output per unit Input vs. Total Input [bottom] Seen in TOP, the change in output by increasing output from L 1 to L 2 is equal to the change from L 2 to L 3 . Seen in BOTTOM, until an output of L 1 , the output per unit is increasing. After L 1 , the output per unit decreases to zero at L 3 . Together, these demonstrate diminishing returns from L 1 .