What Is Meant by Diminishing Marginal Returns?
The law of diminishing marginal returns is an economic theory relating to the value of hiring an additional employee or acquiring an additional piece of equipment or business service. It is also often called the law of diminishing returns.
Other People Are Reading
-
Basics
-
The basics of the law of diminishing returns are that each additional unit whether it be personnel or equipment will provide the company with less benefit than the previous one.
Personnel
-
When applied to personnel, the law of diminishing marginal returns means basically that if it takes one man 1,000 days to do a job you can't just hire1000 people to complete the project in one day. If you were working on a small item most of the people would just get in the way. If you are working in a factory there are only so many machines available. There are limitations to the number of people that can work on a specific project and, as the number of people increases the need for communication increases, the amount of middle management increases and the number of units produced per person decreases.
-
Machines
-
Even when applied to machines, the law of diminishing returns applies. Going from one machine to two might increase productivity but if one person had to operate both machines productivity wouldn't necessarily double. So, each additional machine is less productive than the last. Even if you add a machine and an operator, at some point it gets too crowded and productivity actually decreases. Once again, at some point, the production per machine decreases with each additional machine. The law also states that there is an optimal combination of inputs that will result in the maximum output.
-
References
Resources
- Photo Credit Shopfloor image by ladywearsblack from Fotolia.com
