Definition

law of diminishing returns

The law of diminishing returns is a classic economic concept that states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. To continue to make an investment after a certain point (which varies from context to context) is to receive a decreasing return on that input.

The law of diminishing returns has broader applications than economics. In fact, it is one of the most widely recognized economic principles outside of the economic classroom. In a call center, for instance, service level improvements decline in rate in relation to each additional successive agent added.

Other real-world examples abound:

  • A student considering one more hour of study after 2 AM.
  • A prospective car buyer evaluating the benefits of a higher grade of luxury vehicle
  • A farmer weighing adding an extra bushel of fertilizer to a saturated field of corn
  • A marketer analyzing the ROI of additional media buys in a long-running campaign

See also the law of increasing opportunity cost, which states that returns on an investment decrease as the opportunity costs for that investment rise.

This was last updated in March 2007
Posted by: Margaret Rouse

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