Tuesday, March 24, 2015

The Law of Diminishing Returns

by Antonio C. Antonio
March 16, 2015

If the input of one resource is increased by equal increments per unit of time while the quantities of other inputs are held constant, there will be some point beyond which the marginal physical product of the variable resource will decrease (Leftwich, 1979).  To those of us who have no economics background, this definition of the Law of Diminishing Returns is quite technical and, therefore, tough to understand in the mind of an average person.

Let’s try to keep it simple… There are several definitions of the Law of Diminishing Returns:
  • The tendency for a continuing application of effort or skill toward a particular project or goal to decline in effectiveness after a certain level of results has been achieved.
  • A law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness.
  • An economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.
A concept in economics that if one factor (labor, for example) of production is increased while other factors (say: machines and workspace) are held constant, the output per unit of the variable factor will eventually diminish.  Although the marginal productivity of the workforce decreases as output increases, diminishing returns do not mean negative returns until the number of workers exceeds the available machines or workspace.  If additional labor is hired, the combination of workspace and workforce would be less efficient because the proportional increase in the overall output would be less than the expansion of the labor force.  The output per worker will therefore decrease.  This rule holds true in any process of production unless the production infrastructure and technique also changes.

In the case of the uplands, natural resources needs time to regenerate.  Increasing the production output without enhancing the regeneration capability of the land will eventually not be sustainable.  The Law of Diminishing Returns only applies to renewable resources under the ambit of sustainable development.

The accompanying photo in this article is a graphic illustration of the Law of Diminishing Returns.

Just my little thoughts…

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