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‘Diminishing returns’ or ‘Diminishing
marginal returns’ is one of the oldest and most fundamental economic
concepts. In simple terms, ‘diminishing
returns’ means the decrease/ per unit in the output of a production exercise
when only single production input is increased keeping all other factors of
production unaltered.
The ‘law of diminishing returns’ states that in every production process,
addition of more and more of a single factor of production , while keeping
supply of all other factors of production constant does not result in
proportionate increase in the output. At some point, there will infact be a
lower return of output/ unit of input. The law is also called
‘law of diminishing marginal returns’ or
‘law of increasing relative cost’.
It is not very difficult to establish the veracity of the law. When we talk of
the factors of production process and the output/ product of the process, we
understand that the output is the resultant of contribution from all factors of
production in some definite proportions. When a particular factor of production
is added, while keeping all other factors constant, the contribution from the
increased factor will not be matched by contributions from other factors of
production. As a result, the quantity of output does not increase. Adding more
and more of a single factor does not result in any increase in the quantity of
output.
Significance
Even though ‘diminishing returns’ is an economic concept, it finds extensive applications
in various areas like agriculture, medicine, industry, human relations and
personnel management. These applications can be understood by several examples.
In agriculture, fertilizers used fro increase in crop yield give very good
results in the beginning. But increase in the quantity of fertilizers, increases
the crop yield to some extent but not proportionately to the quantity of
fertilizers. The crop yield per unit of fertilizer decreases as the quantity of
fertilizer in increased.
Law of diminishing returns finds applications in Industry also. When once
the right combination of factors of production for a particular product is
arrived at, any attempt to increase production should entail increase in supply
of all factors of production in respective proportions. Here increase in a few
factors does not result in the desired increase in the output.
HR experts experience the ‘law of
diminishing returns’ several times. A worker produces more in the first few
hours of his/ her work, while the same work/ hour cannot be turned during later
part of his/ her working time. HR experts should be very cautious in extracting
overtime work from the workers, since during the overtime period , not much work
will be really turned out.
‘Law of diminishing returns’ is a real speed breaker on excessive greed of man
since it puts a check on excessive exploitation of any particular factor of
production by diminishing the returns.
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