Law of Diminishing Marginal Returns

Definition

The law of diminishing marginal returns states that as more units of a variable input are added to a fixed input, the additional output produced will eventually decrease. In other words, the increase in production becomes less efficient as more resources are added.

Related terms

Total Product: Total product refers to the total amount of output produced by all inputs combined. It represents the overall effectiveness of production.

Marginal Product: Marginal product is the additional output produced by using one more unit of a variable input while keeping other inputs constant.

Fixed Costs: Fixed costs are expenses that do not change regardless of the level of production. They include rent, salaries, and insurance premiums.