diminishing returns

The law of diminishing returns says that, if you keep increasing one factor in the production of goods (such as your workforce) while keeping all other factors the same, you’ll reach a point beyond which additional increases will result in a progressive decline in output. In other words, there’s a point when adding more inputs will begin to hamper the production process.

For example, take a farmer with a limited number of acres. If that farmer has too few workers to farm the land, the farmer won’t be able to produce the maximum crop the land can yield. Adding more workers will likely increase the level of production—to a point. But if the farmer goes beyond this limit, production will begin to fall, simply because there are too many workers and not enough land.

This principle applies to almost every kind of production process. Unless other production factors are changed, the excessive increase of a single input will lead to a progressive decline in output.

Economists once believed that population growth would eventually expand to a point where the amount of goods produced per person would begin to decrease. In other words, the law of diminishing returns would eventually become a factor on a regional or global scale. This would lead to wide-scale poverty and suffering, which would eventually limit population growth.

Although this principle may apply to stagnant or underdeveloped economies, it’s not the case for economies that work to continuously advance their production technologies. What many early economists didn’t factor in was the impact of scientific and technical advances. In contrast to stagnant economies, “progressive economies” with advancing technologies have been able to perpetually increase their productive outputs and raise the standard of living despite their rising populations.