The law of diminishing marginal returns states that as additional units of a variable input are added to a fixed input in the production process, the marginal output (additional output produced) will eventually decrease.
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In other words, while increasing one input, holding other inputs constant, will initially lead to an increase in output, there comes a point where each additional unit of the variable input contributes less to the total output than the previous unit.
For example, let’s consider a pizza restaurant with a fixed amount of oven space and labor. Initially, adding more workers (variable input) to the kitchen increases the number of pizzas produced per hour. However, beyond a certain point, adding more workers becomes counterproductive. Too many workers may overcrowd the kitchen, leading to inefficiencies such as confusion, coordination problems, and workspace congestion. As a result, the marginal output of each additional worker diminishes, and the total output may even start to decrease if the kitchen becomes too crowded.
In summary, the law of diminishing marginal returns highlights the idea that there is an optimal level of input usage in production, beyond which the additional output gained from increasing the input diminishes.