Diminishing returns is graphed by assigning the input factor to the x-axis and assigning the output, or product, to the y-axis. The total product curve is the total number of units produced per units of input. The marginal product curve is the marginal product generated per units of input. Diminishing returns is reflected at the point where the marginal product curve has a negative slope.
Continue ReadingThe law of diminishing returns is an economic theory that states there is a point in a production process where the increase of a variable input causes a decrease in the marginal product output, holding all other production factors constant.
For example, XYZ Auto Company is selling more vehicles than it is capable of producing. To keep up with demand, XYZ begins a hiring campaign. In the first week after hiring 10 new workers, 100 automobiles are produced, which is 50 more than the previous week. This results in a marginal product number of 50 automobiles. The next week, XYZ hires another 10 workers resulting in a total of 200 vehicles produced. The marginal product number for this week is 100. Another 10 workers are hired the next week, and the company produces 250 vehicles. The marginal product number is 50 automobiles, which is a reduction from the previous week. It is at this point the production process is experiencing the law of diminishing returns.
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