What are diminishing returns?

The Law of Diminishing Returns is a fundamental theory and pertains to a production function in the short run. It is important to note that Diminishing Returns does not work the same way in the long run. To begin, the short run is defined as when at least one factor of production is fixed. One of the best ways to imagine Diminishing Returns is picture a scenario where the variable factor is labour, and the fixed factors are land, capital, and entrepreneurship. If more and more labour were added in the scenario it would reach a point at which the marginal product of labour would decrease. Another way to put it would be to say that the efficiency of the labour decreases. A simple way to think of it is the saying, "too many cooks, spoil the broth".

Answered by Nathan F. Economics tutor

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