FREE ESSAY ON DIMINISHING RETURNS

DIMINISHING RETURNS

Law of Diminishing Returns
The Law of diminishing returns is a key one in economics. It is used to explain many of
the ways the economy works and changes. It is a relatively simple idea; spending and
investing more and more in a product where one of the factors of production remains the
same means the enterprise will eventually run out of steam. The returns will begin to
diminish in the long run. If more fertilizer and better machinery are used on an acre of
farmland, the yield will increase for a while but then begin to slow and become flat. A
farmer can only get so much out of the land, and the more the farmer works, the harder it
gets. The economic reason for diminishing returns of capital is as follows: When the
capital stock is low, there are many workers for each machine, and the benefits of
increasing capital further are great; but when the capital stock is high, workers already
have plenty of capital to work with, and little benefit is to be gained from expanding
capital further. For example, in a secretarial pool in which there are many more
secretaries than computer terminals, each terminal is constantly being utilized and
secretaries must waste time waiting for a free terminal. In this situation, the benefit
in terms of increased output of adding extra terminals is high. However, if there are
already as many terminals as secretaries, so that terminals are often idle and there is
no waiting for a terminal to become available, little additional output can be obtained
by adding yet another terminal.
Another application for this law is in Athletics, for runners, their investment is the
time and energy put into training and the yield is hopefully improved fitness. Early in
their running careers or early in the training program a couple of weeks of regular
training would be rewarded with a considerable increase in fitness. Having achieved a
very fit state though, two weeks of regular training will achieve a barely perceptible
increase in fitness.
But in today's world, this famous law seems to have been turned on its head. In Japan,
for example, huge amounts of investment have resulted in large increases in the economy
and large increases in capital goods per worker. But the rate of productivity growth did
not decline the way one would have expected on the basis of diminishing returns. Japan
got ahead and stayed ahead.