Law of Diminishing Returns

Law of Diminishing Returns

    The law of diminishing returns states that when successive units of a variable resource such as labor are added to a fixed resource such as capital or land beyond some point, the amount of extra product that can be attributed to each additional unit of variable resource will decline. The law assumes that technology is fixed and thus the techniques of production do not change.

The law of diminishing returns showed that if you hired too many harvesters, productivity and final cost actually worked in an opposing way. Because the amount of land didn't increase, there would be too many harvesters, each doing only a little work. Therefore, productivity actually decreased. Moreover, the cost of hiring all the harvesters was high, especially considering that lowered productivity. The law of diminishing returns proved there's a point at which hiring more harvesters actually hurts the farm's bottom line.



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