Published Dec 26, 2022 The concept of diminishing returns states that as more of a factor of production is added to a production process, its marginal output will eventually decrease. That means the additional output from each additional input unit will eventually become smaller. To illustrate this, let’s look at a farmer who owns a small plot of land. He decides to plant corn on it and hires a few workers to help him. At first, the additional workers help him to increase the output of corn significantly. However, after a certain point, hiring additional workers won’t help him to increase the output any further. That’s because the land can only produce a certain amount of corn, and the additional workers can’t do anything to increase that. As a result, the farmer experiences diminishing returns. Diminishing returns are an important concept for understanding the behavior of firms in a competitive market. It explains why firms in a competitive market can’t increase their profits indefinitely. That’s because the additional output from each additional input unit eventually becomes smaller. Thus, the firm can only increase its profits up to a certain point. Beyond that, the additional output from each additional unit of input is too small to make a significant difference.Definition of Diminishing Returns
Example
Why Diminishing Returns Matters
Economics