Law of Diminishing Marginal Returns

An economic law stating that when more and more units of a factor of production (i.e. labor, capital) are added to fixed amounts of other productive factors, the additional output for each new unit employed eventually declines.

Consider a factory that employs laborers to produce its product. At first an addition of more laborers will result in more output. However, the factory has limited space and can only accommodate a limited number of laborers. As such, if all other factors of production remain constant, at some point each additional laborer will crowd the space in the factory making each additional employee provide less output than the previous laborer. At this point, each additional employee provides less and less return. If new employees are constantly added, the plant will eventually become so crowded that additional workers actually decrease the efficiency of the other workers, decreasing the production of the factory.

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