Diminishing Returns
The principle that adding more of one input while holding others constant eventually yields smaller output increments.
What is Diminishing Returns?
The law of diminishing returns states that adding more of one input factor while holding other inputs constant will eventually yield smaller increments of output. It is a foundational concept in production economics and explains why firms do not simply hire unlimited labor or add capacity indefinitely. Diminishing returns to a factor kick in once the optimal input mix is exceeded.
Example
A restaurant kitchen with 2 chefs produces 50 meals per hour. Adding a 3rd chef raises output to 80 meals, a 4th to 100 meals, but a 5th chef may only add 10 meals as crowding and coordination costs grow — illustrating diminishing marginal returns to labor.