What Is a Diminishing Returns Curve?

Diminishing returns is an economic concept that establishes a relation between the changes in the levels of input with respect to changes in the levels of output. This concept establishes a point beyond which additional deployment of resources would yield less than the proportional increase in the output.

Features

As businesses grow in size, so does their utilization of resources. Companies use capital, labor and raw materials as resources. When by increasing the resources the firm experiences more than proportional results in output, its returns curve is said to be on the increasing path. When the input and output are proportional, the firm is on the constant returns curve. And when the results are less than proportional, the returns curve is diminishing.

Identification

With additional deployment of resources, every firm would first experience increasing returns, then constant returns and then in the end diminishing returns on the curve. On the "X" axis, the input levels are plotted and on the "Y" axis, the returns are depicted.

Significance

A firm experiencing a diminishing returns curve must clearly take stock of its situation. Factors such as the firm producing more than the demand, rising per-unit costs of production and indirect expenses could be the causes. The company then is able to remedy these flaws.

References

• InvestorWords: Diminishing Returns
• Merriam Webster: Diminishing Returns