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| | My name is Marjorie and I am studying Creative Writing and Environmental Management at Capel Isaac / Great Britain.<br><br>Here is my web blog ... [http://www.161989up.com http://www.161989up.com] |
| {{Economics sidebar}}
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| In [[economics]], '''diminishing returns''' (also called '''diminishing marginal returns''') is the decrease in the [[Marginalism|marginal]] (per-unit) output of a [[production (economics)|production]] process as the amount of a single [[Factors of production|factor of production]] is increased, while the amounts of all other factors of production stay constant.
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| The '''law of diminishing returns''' (also '''law of diminishing marginal returns''' or '''law of increasing relative cost''') states that in all productive processes, adding more of one factor of production, while holding all others constant ("''[[ceteris paribus]]''"), will at some point yield lower per-unit returns.<ref name=Samuelson2001p110>{{cite book |first1=Paul A. |last1=Samuelson |author1-link=Paul Samuelson |first2=William D. |last2=Nordhaus |title=Microeconomics |publisher=McGraw-Hill |year=2001 |isbn=0071180664 |pages=110 |edition=17th}}</ref> The law of diminishing returns does not imply that adding more of a factor will decrease the ''total'' production, a condition known as '''negative returns''', though in fact this is common.
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| For example, the use of [[fertilizer]] improves crop production on farms and in gardens; but at some point, adding more and more fertilizer improves the yield less per unit of fertilizer, and excessive quantities can even reduce the yield. A common sort of example is adding more workers to a job, such as assembling a car on a [[shop floor|factory floor]]. At some point, adding more workers causes problems such as workers getting in each other's way or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less effectively.
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| The law of diminishing returns is a fundamental principle of economics.<ref name=Samuelson2001p110/> It plays a central role in [[production theory basics|production theory]].
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| ==History==
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| {{Expand section|date=December 2009}}
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| The concept of diminishing returns can be traced back to the concerns of early economists such as [[Johann Heinrich von Thünen]], [[Anne Robert Jacques Turgot, Baron de Laune|Turgot]], [[James Steuart (economist)|James Steuart]], [[Thomas Malthus]] and [[David Ricardo]]. However, classical economists such as Malthus and Ricardo attributed the successive diminishment of output to the decreasing quality of the inputs. Neoclassical economists assume that each "unit" of labor is identical. Diminishing returns are due to the disruption of the entire productive process as additional units of labor are added to a fixed amount of capital. The law of diminishing returns remains an important consideration in farming
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| ==Diminishing marginal returns==
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| Suppose that one kilogram of seed applied to a plot of land of a fixed super-size produces one ton of crop. You might expect that a return equals the extra amount of crop produced divided by the extra amount of seeds planted.
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| A consequence of diminishing marginal returns is that as total investment increases, the total return on investment as a proportion of the total investment (the average product or return) decreases. The return from investing the first kilogram is 1 t/kg. The total return when 2 kg of seed are invested is 1.5/2 = 0.75 t/kg, while the total return when 3 kg are invested is 1.75/3 = 0.58 t/kg.
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| This particular example of Diminishing Marginal Returns in formulaic terms:
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| Where <math>\text{D}</math> = Diminished Marginal Return, <math>\text{X}</math> = seed in kilograms, and <math>\frac{1}{2^{i-1}}</math> = crop yield in tons gives us:
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| <math>\frac{1}{X}\sum_{i=1}^{X}\frac{1}{2^{i-1}}=\text{D}</math>
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| Substituting 3 for <math>\text{X}</math> and expanding yields:
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| <math>\frac{1}{3}\sum_{i=1}^{3}\frac{1}{2^{i-1}}=\text{D}</math>
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| <math>=\frac{1}{3}\cdot\left(\frac{1}{2^{1-1}}+\frac{1}{2^{2-1}}+\frac{1}{2^{3-1}}\right)</math>
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| <math>=\frac{1}{3}\cdot\left(\frac{1}{2^0}+\frac{1}{2^{1}}+\frac{1}{2^{2}}\right)</math>
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| <math>=\frac{1}{3}\cdot\left(\frac{1}{1}+\frac{1}{2}+\frac{1}{4}\right)</math>
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| <math>=\frac{1}{3}\cdot\left(\frac{7}{4}\right)</math>
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| <math>=\frac{7}{12}</math>
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| <math>=0.58\overline{3}\text{ t/kg}</math>
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| Another example is a factory that has a fixed stock of capital, or tools and machines, and a variable supply of labor. As the firm increases the number of workers, the total output of the firm grows but at an ever-decreasing rate. This is because after a certain point, the factory becomes overcrowded and workers begin to form lines to use the machines. The long-run solution to this problem is to increase the stock of capital, that is, to buy more machines and to build more factories.
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| ==Returns and costs==
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| There is an inverse relationship between returns of inputs and the cost of production. Suppose that a kilogram of seed costs one [[dollar]], and this price does not change. Although there are other costs, assume they do not vary with the amount of output and are therefore [[fixed cost]]s. One kilogram of seeds yields one ton of crop, so the first ton of the crop costs one dollar to produce. That is, for the first ton of output, the [[marginal cost]] of the output is $1 per ton. If there are no other changes, then if the second kilogram of seeds applied to land produces only half the output of the first, the marginal cost would equal $1 per half ton of output, or $2 per ton. Similarly, if the third kilogram of seeds yields only a quarter ton, then the marginal cost equals $1 per quarter ton, or $4 per ton. Thus, diminishing marginal returns imply increasing marginal costs and rising average costs.
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| Cost can also be measured in terms of [[opportunity cost]]. In this case the law also applies to societies – the opportunity cost of producing a single unit of a good generally increases as a society attempts to produce more of that good. This explains the bowed-out shape of the [[production possibilities frontier]].
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| ==See also==
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| {{Portal|Economics}}
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| * [[Accelerating returns]]
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| * [[Constructal law]]
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| * [[Diminishing marginal utility#Marginal utility|Diminishing marginal utility]], also not to be mistaken for 'diminishing returns'
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| * [[Diseconomies of scale]], does not assume fixed inputs, thus differing from 'diminishing returns'
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| * [[Economies of scale]]
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| * [[Increasing returns]]
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| * [[Learning curve]] and [[Experience curve effects]]
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| * [[Logistic function]]
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| * [[Marginal value theorem]]
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| * [[Moore's law]]
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| * [[Opportunity cost]]
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| * [[Pareto principle]]
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| * [[Submodular set function]]
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| * [[Tendency of the rate of profit to fall]]
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| * [[Liebig's Law of the minimum]]
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| ==References==
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| {{reflist}}
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| ==Sources==
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| *{{cite book |last1=Case |first1=Karl E. |last2=Fair |first2=Ray C. |title=Principles of Economics |publisher=Prentice-Hall |year=1999 |isbn=0-13-961905-4 |edition=5th}}
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| {{economics}}
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| [[Category:Economics laws]]
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| [[Category:Production and organizations]]
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| [[Category:Production economics]]
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| {{Link GA|cs}}
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My name is Marjorie and I am studying Creative Writing and Environmental Management at Capel Isaac / Great Britain.
Here is my web blog ... http://www.161989up.com