This can be graphically illustrated as follows. Using fertilizer in the agriculture industry is another clear example that carries the same results. Plants need an exact quantity for the more yield. Very Small quantity leads to a less output, but large quantities can also lead to a less output. Accordingly, with the increase of input, output increases at an increasing rate, then decreases, maximizes and starts to reduce. The point yield gets the highest value at the point where MP gets its maximum and MC gets its minimum value.
Diminishing marginal returns is an important economic theory that explains the behavior of inputs and outputs pertaining to the production process. In general context, we believe that with the increase of the number of inputs, the number of output will increase.
But diminishing marginal returns concept describes a different behavior. Accordingly, if the production process allocates more and more variable inputs, the output will increase up to a certain point before it starts to fall eventually. We may see this in local stores which see a low footfall.
On occasion, employing more people can disrupt others. For example, squeezing more workers into the same office may create an uncomfortable atmosphere. Similarly, bringing in a new piece of machinery might create unintended consequences.
For instance, it may alter the room temperate, thereby affect the quality of other products. The law of Diminishing Marginal Returns can only occur in the short-run. This is because all factors are variable in the long-run. For example, having an additional worker in the cafe may create for a chaotic environment.
However, the employees may learn to work more efficiently together and therefore produce better returns in the long-term. Farms are a classic example of Diminishing Marginal Returns, as they have a specific acreage to harvest.
Only 4 employees are needed, so anything more would bring about Diminishing Returns. There is also the case for fertiliser use which can help boost growth. Too much fertiliser can start to kill the farms crops, whilst just enough can help increase output.
In Education, students tend to spend roughly 5 to 6 hours in a classroom. Others may spend 2 hours revising every night. However, there is a certain point where students continue to revise but do not digest the information. For example, if student X spends 12 hours straight revising, those last few hours are unlikely to produce any positive results. At a certain point, we all become bored or disengaged from a topic or subject.
After this point, we are driven purely by will power. That is not necessarily the most productive way to learn and will produce Diminishing Marginal Returns in the amount of information we take in. The Coffee House example shows how too many employees can cause confusion and create inefficiencies. For example, 3 barristers may be working at the coffee shop. They can efficiently serve customers. Two barristers may make the same order without knowing. To take this example to the extreme; imagine workers crammed into your local coffee shop.
As you can imagine, it would be quite chaotic. At a certain point, adding another employee will start to decrease the efficiency of the operation. As we can see from the diagram, at 3 workers, the gap between marginal profit and marginal cost is at its maximum. However, at 4 workers, the marginal cost of producing an additional unit starts to become more expensive. Accessed August 6, Financial Analysis. Financial Ratios. Your Privacy Rights.
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Personal Finance. Your Practice. Popular Courses. Financial Ratios Guide to Financial Ratios. Key Takeaways The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output. After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yield decreased per-unit incremental returns. For example, if a factory employs workers to manufacture its products, at some point, the company will operate at an optimal level; with all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.
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