Law of Diminishing Returns
-
The Law of Diminishing Returns is an economic principle that states:
As you continue to invest more of a single resource into a process, while keeping everything else constant, the added benefit from each additional unit will eventually decrease.
In Simple Terms:
Doing more of something eventually produces less of a result.
Example in Business:
-
You hire more workers to make sandwiches in a small kitchen.
-
At first, output increases.
-
But after a point, the kitchen gets crowded — each extra worker adds less value than the one before.
-
Eventually, adding more people might lower productivity.
Formulaic View:
If all inputs are fixed except one (like labor), the marginal return on that input will decrease over time.
Real-World Applications:
-
Marketing: Spending more on ads may lead to fewer new customers per dollar.
-
Productivity: Working longer hours may reduce efficiency and creativity.
-
Inventory: Stockpiling too much can lead to spoilage or storage costs.
Why It Matters:
Understanding this law helps businesses:
-
Avoid overinvestment
-
Optimize resource allocation
-
Make better scaling decisions
-
