Producer Theory - The Law of Diminishing Returns



Summary by: 
Daru Anggoro Aji ( 120720140035 )

The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant ("ceteris paribus"), will at some point yield lower incremental per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.

For example, the use of fertilizer improves crop production on farms and in gardens; but at some point, adding increasingly more fertilizer improves the yield by less per unit of fertilizer, and excessive quantities can even reduce the yield. A common sort of example is adding more workers to a job, such as assembling a car on a factory floor. At some point, adding more workers causes problems such as workers getting in each other's way or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less effectively.

The law of diminishing returns is a fundamental principle of economics. It plays a central role in production theory.

References: http://en.wikipedia.org/wiki/Diminishing_returns [accessed 30/08/2014]