The Law of Diminishing Returns is an economic truism. Its states that:
When increasing amounts of a variable factor of production are used in conjunction with a certain quantity of a fixed factor of production, the output per unit of the variable factor eventually begins to decline.
The operation of the law can be best understood by means of a simple example. Suppose a man decides to apply his labour to a ten-acre field in order to grow beet. Despite his best efforts he may find that he could do with extra help if the whole field is to be cultivated. If he employs a helper, total production of beet would probably rise significantly as each of them could specialise e.g. one ploughing the field and the other planting beet. Total output might even continue to rise significantly on the employment of a third worker. However the average output per worker will eventually begin to diminish as more and more workers are employed to work the ten acre field. In other words, when an increasing number of labour units are applied to a fixed quantity of land, the return per unit of labour eventually begins to diminish. Imagine thirty extra workers still trying to grow beet in this field. In such crowded circumstances workers would become a hindrance and obstruction to one another. Output per worker would fall significantly as the field became saturated with workers. A fixed piece of land can only yield a certain output and beyond a certain point the application of more and more workers will not increase the total output of the field significantly. Diminishing returns is said to have set in at the point at which average output per worker declined.
The law of diminishing returns is based on a number of assumptions:
1.Methods of production remain constant, as does the level of technology.
2.The quality of the the additional units of the factor being applied are constant.
3.The law assumes that one factor is fixed. Therefore, it only applies in the short run.