What is the law of diminishing marginal returns?

The law of diminishing marginal returns is also referred to as the "law of diminishing returns," the "principle of diminishing marginal productivity," and the "law of variable proportions." This law affirms that the addition of a larger amount of one factor of production, ceteris paribus, inevitably yields decreased per-unit incremental returns.

Why is diminishing returns important?

Understanding the concept of diminishing returns allows firms to optimise resource allocation, improve productivity, and avoid inefficiencies. This law states that when a variable factor of production is added to some fixed inputs, the marginal product eventually diminishes.

What is the law of diminishing returns?

The law of diminishing returns is not only a fundamental principle of economics, but it also plays a starring role in production theory. Production theory is the study of the economic process of converting inputs into outputs.