What is the 'Law Of Diminishing Marginal Productivity'?
The law of diminishing marginal productivity is an economic principle. It states that while increasing one input and keeping other inputs at the same level may initially increase output, further increases in that input will have a limited effect and will eventually have no effect, or a negative effect, on output. The law of diminishing marginal productivity helps explain why increasing production is not always the best way to increase profitability.
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Marginal productivity refers to the extra output yielded by an additional unit of input. Inputs include labor and raw materials. The law of diminishing marginal returns states that when a factor of production is fixed, there is a point at which an increasing volume of variable factors will become less productive. This means that each additional unit of input will produce less output than the prior unit of input. Diminishing marginal productivity results from rising short-term average costs. Firms can address short-term average costs by reducing output to an optimal level or increasing other factors of production. These measures can ensure profit maximization.
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