If you were a farmer, how would you determine the optimum number of farmhands to employ, or the amount of fertilizer to use on your crop?
If you owned a pizza outlet, how would you determine the optimum number needed at your pizza joint?
In all these situations, the optimum number of chefs and farmhands and amount of fertilizer needed depends on something known as the law of diminishing marginal returns.
The law of diminishing marginal returns is a universal economic law that states that, in any production process, if you progressively increase one input, while holding all other factors/inputs constant, you will eventually get to a point where any additional input will have a progressive decrease in output.
In other words, you will get to a point where the benefits gained from increasing each extra unit of the input will start decreasing.
For instance, holding other factors constant, increasing the number of chefs in your pizza outlet will increase pizza production up to a certain point.
However, it will get to a point where increasing the number of chefs will not result in any meaningful increase in pizza production. If you keep increasing the number of chefs, it can even result in a decrease in pizza production.
The law of diminishing marginal returns is a scientific expression of the common knowledge that too much of a good thing can actually be harmful to you.
It is good to note that the law of diminishing marginal returns is only applicable on a short term basis, because some other factor of production will eventually change in the long run.
The law of diminishing marginal returns traces its roots back to the world's very earliest economists, such as David Ricardo, Thomas Robert Malthus, Johann Heinrich Von Thunen, James Steuart and Jacques Turgot.
These early economists, ignoring the possibility that the means of ...read more