Diminishing marginal returns is a concept in economics such that when there is an added amount of variable resources to increase overall production, the marginal increase, or additional benefit per additional resource, is reduced. The reason for diminishing marginal returns is the result of any particular resource that has a fixed amount, at least in the short term.For example, in a factory
. setting, the factory building and the assembly line is generally fixed; there is no additional space to put more workers beyond a certain point. Suppose a company wanted to increase productivity by increasing the number of raw materials and number of workers to put the products together. Due to space constraints, as materials and workers increase it takes a longer time for the additional workers to access needed manufacturing tools to create the products or it takes a longer time for the workers to get the materials as it has to travel further down the assembly line. Overall productivity still increases by adding more materials and workers but the marginal increase is smaller, so the rate of growth declines as more and more variable resources are added.Some diagrams available at http://www.unc.edu/depts/econ/byrns_web/Economicae/lawofdmr.html provide graphical demonstrations of the law of diminishing marginal returns. The total product curve shows that as labor, or workers per 8 hour shift, increases, the quantity of product produced increases but increases at a slowing rate until it finally levels off flat. Additionally there is a graph that shows the marginal increase per additional unit of labor; it shows that there is an optimal or maximum marginal increase at a certain level of labor units far less than the point where the total product curve flattens off.The range where marginal products are increased is called the "range of increasing marginal returns." The range where marginal returns decline from the peak but the overall output of the product still increases is called the "range of diminishing marginal returns." After a certain point, adding more units of labor results in a negative overall return in production due to overcrowded space or other fixed constraints; this is the range of negative marginal returns. A graphical representation of these concepts is available in figure 8.3 on the following page: http://www.flatworldknowledge.com/node/28308. More reference links: http://www.unc.edu/depts/econ/byrns_web/Economicae/lawofdmr.html http://www.flatworldknowledge.com/node/28308#
