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The law of diminishing returns has broader applications than economics. In fact, it is one ofthe most widely recognized economic principles outside of the economic classroom. In acallcenter, for instance, service level improvements decline in rate in relation to each additionalsuccessive agent added.

Other real-world examples abound:

A student considering one more hour of study after 2 AM. A prospective car buyer evaluating the benefits of a higher grade of luxury vehicle A farmer weighing adding an extra bushel of fertilizer to a saturated field of corn A marketer analyzing theROIof additional media buys in a long-running campaign

Other example

Suppose that one kilogram of seed applied to a plot of land of a fixed size produces one tonof crop. You might expect that an additional kilogram of seed would produce an additionalton of output. However, if there are diminishing marginal returns, that additional kilogramwill produce less than one additional ton of crop (ceteris paribus). For example, the secondkilogram of seed may only produce a half ton of extra output. Diminishing marginal returnsalso implies that a third kilogram of seed will produce an additional crop that is even lessthan a half ton of additional output. Assume that it is one quarter of a ton.In economics, the term "marginal" is used to mean on the edge of productivity in aproduction system. The difference in the investment of seed in these three scenarios is onekilogram - "marginal investment in seed is one kilogram." And the difference in output, the

crops, is one ton for the first kilogram of seeds, a half ton for the second kilogram, and onequarter of a ton for the third kilogram. Thus, the marginal physical product (MPP) of theseed will fall as the total amount of seed planted rises. In this example, the marginal product(or return) equals the extra amount of crop produced divided by the extra amount of seedsplanted.A consequence of diminishing marginal returns is that as total investment increases, thetotal return on investment as a proportion of the total investment (the average product orreturn) decreases. The return from investing the first kilogram is 1 t/kg. The total returnwhen 2 kg of seed are invested is 1.5/2 = 0.75 t/kg, while the total return when 3 kg areinvested is 1.75/3 = 0.58 t/kg.Another example is a factory that has a fixed stock of capital, or tools and machines, and avariable supply of labor. As the firm increases the number of workers, the total output of thefirm grows but at an ever-decreasing rate. This is because after a certain point, the factorybecomes overcrowded and workers begin to form lines to use the machines. The long-runsolution to this problem is to increase the stock of capital, that is, to buy more machines andto build more factories.

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