What Does It Mean If Your Business Has Diminishing Marginal Product?


Quick Answer

According to Investopedia, a company suffering from diminishing marginal product is experiencing a situation where further input into a product or service no longer leads to the same increase in the value of that product or service than earlier increased inputs do. This is a sample of the law of diminishing marginal productivity, with inputs being anything from raw materials to increased business hours or better trained personnel.

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Full Answer

An example of a business experiencing diminishing marginal product is that of a computer manufacturer extending the processor speeds of its computers while the software used on the computer remains the same. Early extensions of speed may have made the software operate faster and provided an improved user experience. Later speed extensions, however, may have a less marked effect on the operations of the software, leading to a less prominent change in experience.

Eventually, under the law of diminishing marginal productivity, further speed extensions will have little to no effect on the running of software. At this point, in order to gain positive marginal productivity again for the same cost, the company may choose to select a different input to improve. These alternative inputs can be anything from improving the software to take advantage of the higher speeds to increasing marketing efforts to raise awareness of the improved capabilities of the computers.

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