The law of diminishing returns

The law of diminishing returns interacts with another economic principle - increasing imputed costs. It determines how the costs of production factors, resources and output of goods and services will be correlated. First of all, it is taken into account how the increase in costs will affect the quantity of products that are manufactured. And this is provided that other factors remain unchanged.

This is clearly seen in the following example. Four hundred units of some products are produced using several factors acting in the complex. The number of employees initially was two hundred. It is possible to trace to what the gradual increase of this factor (without changing the others) will lead, by increasing each time the number of employees by twenty people. It will be clear that the increase in the resource does not contribute to the growth of output, and hence income, but, on the contrary, slows down its pace. The productivity of the workforce, its performance behaves exactly the same - it falls. This is how the law of diminishing returns works.

The reason for this effect is quite obvious. The ratio between production resources should always be maintained, since they work well only in a complex. As a rule, initially all factors are coordinated among themselves. Naturally, when one of them increases, and the rest remain fixed, a disproportion arises. And in such conditions, when the increase in the workforce does not correspond to other resources (for example, a sufficient amount of equipment, space, etc.), there can be no talk of a full profit.

In general terms, the law of diminishing returns has the following formulation: "The growth of output of a certain type of product due to the increase of one factor with fixed others gradually decreases."

There is one feature on which earlier attention was not accentuated. The growth in output of goods falls not immediately after one factor has been increased. First, if the ratio of resources is not severely disrupted, productivity may even increase. But it does not last long. Beginning with a certain volume of output, disproportions are violated, and the law of diminishing productivity comes into effect. If you look at the big picture, then this process looks like this: the return of one type of resource always depends on its costs or quantity. And this is provided that other factors remain unchanged.

There are indicators such as average and marginal returns. The latter shows how the growth of output and the increase in the resource correspond to each other. The average, however, determines how the volume of the goods produced is correlated with the costs that this issue caused.

And this means that the law of diminishing return will take effect only when the costs reach a value that will correspond to the most rational combination of factors. What happens if the costs are slightly increased? In this case, the average return will equal the marginal and reach its maximum.

Considering the law of diminishing marginal returns, one can not avoid operating with such a notion as "marginal (marginal) values". They are also called relative increments. The marginal value of the indicator in the economy is its increase, due to the change in the factor affecting it, by only one unit. That is, the marginal product is the growth of its production due to the fact that one more unit of the factor influencing the output is used. In our case, an additional resource.

So, the law of diminishing returns says that increasing the use of one factor in order to increase the result, one must not forget that the effect depends on the ratio of the resource that is involved in turnover with others, and not only on its magnitude.