About the Law of Diminishing Marginal Returns
The Law of Diminishing Marginal Returns is a central tenet of economics. It means that while increasing the inputs in a particular economic process will increase the output of the process, after a specific point the growth in output will begin to decline.
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Significance
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The significance of the Law of Diminishing Returns cannot be understated, because it can help to quantify the optimal balance of variable inputs to fixed inputs in a commercial process. For example, if more labor is added to a fixed amount of farming space, the output of food will increase initially. However, as more and more labor is added to the farm, the amount of additional food produced will decline, because the fixed space of the farm cannot increase. The exact right amount of labor to add to make the best use of the farm can be calculated mathematically.
Function
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While advanced mathematical techniques, such as those using calculus, can be used to analyze the impact of this law in a particular process, it is possible to make fairly simple spreadsheets to find the point of diminishing returns. Simply use arithmetic to measure the amount of higher output as one additional unit of input, such as a farmer, is added in a table format. Keep going until the increase starts to decline, and the point of diminishing return will be visible in the spreadsheet.
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Considerations
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Technology and specialization are two key considerations in an understanding of the Law of Diminishing Returns. Technology can enhance the output of a particular process more rapidly than simply increasing the amount of an input like labor or fuel. Specialization concerns the quality of inputs in terms of how much output can be produced using a fixed amount of time and resources.
Benefits
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This economic law can serve management and decision makers in an enterprise by giving it the framework necessary to logically determine the right balance of business, labor or technological input to an enterprise as compared with the limitations of fixed resources.
Potential
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The Law of Diminishing Returns has untapped potential in the arena of service businesses, such as with the legal, medical and consulting professions. For example, it is often assumed that if additional skilled individuals (such as medical professionals, lawyers or consultants) are deployed to solve a problem, this will result in ever increasing results. This is not the case, because there will still be a fixed amount of technology, resources, knowledge and time that will lead to a point of diminishing returns as more specialists are added to a complex process.
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