What are Diminishing Marginal Returns?
Diminishing marginal returns is an economic theory stating that, all else being equal, the output for each producing unit will eventually decrease once a certain number of producing units is realized. This is a very important concept for those in business as it means that hiring new employees will actually decrease efficiency at some point. Managers must always keep this in mind as they strive to maintain the most efficient operation possible. It should be noted that the law of diminishing marginal returns does not predict that overall output will decrease, Rather, it predicts the output produced, per employee, or producing unit, will decrease after a certain point. This could be due to a number of different factors.
Diminishing marginal returns is an economic theory stating that, all else being equal, the output for each producing unit will eventually decrease once a certain number of producing units is realized. This is a very important concept for those in business as it means that hiring new employees will actually decrease efficiency at some point. Managers must always keep this in mind as they strive to maintain the most efficient operation possible. It should be noted that the law of diminishing marginal returns does not predict that overall output will decrease, Rather, it predicts the output produced, per employee, or producing unit, will decrease after a certain point. This could be due to a number of different factors. For example, if 5 employees can produce 100 widgets in an hour’s time, it may be assumed that 10 employees may be able to produce 200 widgets in that same time frame. However, that may not be the case. Production could be dependent on available space and speed of automated
