Explain the law of diminishing returns.

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pohnpei397 eNotes educator| Certified Educator

The law of diminishing returns tells us that, in the short run, a firm will eventually reach a point where adding some input no longer boosts output as much as it once did.  At that point, there are diminishing returns for adding more inputs.

Visualize this with regard to a hypothetical firm making clothes.  The firm has two sets of cutting tools and two sewing machines.  If the firm starts with one employee, adding more employees (adding labor as an input) will bring large returns.  A second employee could cut while the first sews.  A third and fourth employee could use the second set of tools.  Returns for those increases in inputs would be high.

But what if the firm hires a fifth employee?  That employee might do something like carrying cut pieces to the people who are sewing.  Or they might pick up the finished clothes and take them away.  But they would not really add that much to the firm's output.  Therefore, diminishing returns would set in when the firm hired the 5th worker.