Law of Diminishing Returns

Law of Diminishing Returns economic law that states that if one keeps on increasing one factor of production (such as land, labour, or capital) while keeping the other factors of production constant, at some stage the increase in output that results per additional unit of the factor of production will become smaller. For example, adding an extra person to a factory production line may help increase output by reducing hold-ups at an especially complicated stage. However, adding yet another person may not increase output by as much or even at all. In theory, there must be an optimum mix of factors of production for a given business at a given time, though it is impossible ever to know if it has been achieved.

Diminishing returns are sometimes referred to as diseconomies of scale. They are not negative returns (a fall in output), though in time diminishing increases in output may lead to output beginning to decrease. In the example above, there will be a level at which, if you kept adding workers, the production line would not be able to function because workers would be in the way of each other and the machinery.