Law of Diminishing Returns in Economics

Business owners can hire more workers or invest in additional equipment to boost production, but the resulting increase in output will eventually level off and even decline. Economists call this the law of diminishing returns.

Identification

In his "Principles of Economics" textbook, economist Greg Mankiw of Harvard University defined the law of diminishing returns as the principle in which the benefit of an extra unit of input decreases as the quantity of the input rises. Because the issue relates to marginal returns, or the additional output generating by an increase in input, the law of diminishing returns is sometimes called the law of diminishing marginal returns.

History

English economists Thomas Robert Malthus and David Ricardo, writing in the late 18th and early 19th centuries, referred to the idea of diminishing returns. They held that output diminished as the quality of inputs declined.

Features

The Glossary of Political Economy Terms website at Auburn University uses an example from agriculture to illustrate the law of diminishing returns. If a farmer plants tomatoes in a field and increases the amount of fertilizer added, he can increase the number of tomatoes produced. If he doubles the amount of fertilizer from one pound to two pounds, he can still get more tomatoes but the increase will be smaller than the amount gained by going from zero to one pound of fertilizer.

References

• "Principles of Economics," 3rd ed.; N. Gregory Mankiw; 2004
• "New Ideas From Dead Economists"; Todd Buchholz; 1990
• Auburn University: Glossary of Political Economy Terms

Resources

• BusinessDictionary.com: Law of Diminishing Returns