17 March 2009

The Law of Diminishing Returns

Here are a couple of definitions:

Concept in economics that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, for example) are held constant, the resulting increase in output will level-off after some time and then decline. Although the marginal productivity of the workforce decreases as output increases, diminishing returns do not mean negative returns until (in this example) the number of workers exceeds the available machines or workspace. In everyday experience, this law is expressed as "the gain is not worth the pain.”


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:

Drinking beer when you're already drunk
Buying when you can no longer afford
Fighting when it's not fighting for
Giving more time to unimportant things
Staying when it's time to leave.
A student considering one more hour of study after 2 AM and he is burnt out.



leslie balino said...

eto lang ata ang isa sa mga natutunan ko sa economics...at hindi naman marami ang na-gets ko

sabi ng prof ko..ang analogy nya ay about sa seatbelts ng cars...hanggang sa napunta na sa kotse nyang nasira ang usapan pati pamasahe nung time na yun napagusapan pa...

lionheart's den said...

uy naalala ko to ah,

kay prof monsod ko pa nga ito natutunan. i really miss college!!

Lucky Cornel said...

I like this law... I always have it on the back of my mind :D