Diminishing Marginal Returns
| This section lacks a single coherent topic. Please help improve this section by rewording sentences or removing irrelevant information. Specific concerns may appear on the talk page. |
Suppose that one kilogram of seed applied to a plot of land of a fixed size produces one ton of crop. You might expect that a return equals the extra amount of crop produced divided by the extra amount of seeds planted.
A consequence of diminishing marginal returns is that as total investment increases, the total return on investment as a proportion of the total investment (the average product or return) decreases. The return from investing the first kilogram is 1 t/kg. The total return when 2 kg of seed are invested is 1.5/2 = 0.75 t/kg, while the total return when 3 kg are invested is 1.75/3 = 0.58 t/kg.
This particular example of Diminishing Marginal Returns in formulaic terms: Where = Diminished Marginal Return, = seed in kilograms, and = crop yield in tons gives us:
Substituting 3 for and expanding yields:
Another example is a factory that has a fixed stock of capital, or tools and machines, and a variable supply of labor. As the firm increases the number of workers, the total output of the firm grows but at an ever-decreasing rate. This is because after a certain point, the factory becomes overcrowded and workers begin to form lines to use the machines. The long-run solution to this problem is to increase the stock of capital, that is, to buy more machines and to build more factories.
Read more about this topic: Diminishing Returns
Famous quotes containing the words diminishing, marginal and/or returns:
“Back from that great-grandfather I have come
to puzzle a bending gravestone for his sake,
to question this diminishing and feed a minimum
of children their careful slice of suburban cake.”
—Anne Sexton (1928–1974)
“Of course I’m a black writer.... I’m not just a black writer, but categories like black writer, woman writer and Latin American writer aren’t marginal anymore. We have to acknowledge that the thing we call “literature” is more pluralistic now, just as society ought to be. The melting pot never worked. We ought to be able to accept on equal terms everybody from the Hassidim to Walter Lippmann, from the Rastafarians to Ralph Bunche.”
—Toni Morrison (b. 1931)
“Any man today who returns from work, sinks into a chair, and calls for his pipe is a man with an appetite for danger.”
—Bill Cosby (20th century)