Law Of Diminishing Marginal Productivity

DEFINITION of 'Law Of Diminishing Marginal Productivity'

An economic principle that states that while increasing one input and keeping other inputs at the same level may initially increase output, further increases in that input will have a limited effect, and eventually no effect or a negative effect, on output. The law of diminishing marginal productivity helps explain why increasing production is not always the best way to increase profitability.

BREAKING DOWN 'Law Of Diminishing Marginal Productivity'

The law of diminishing marginal productivity shows us that instead of continuing to increase the same input, it might be better to stop at a certain level, increase a different input, or produce an additional or different product or service to maximize profit.

As an example, let’s consider a pizza restaurant that wants to increase profitability. Increasing the amount of cheese (the input) that goes on each pizza can create a more delicious product and sell more pizzas. But at some point, the pizza reaches an optimal cheese level. The amount of cheese must be balanced with the crust thickness, amount of sauce and other pizza toppings, if any. If the restaurant continues to add more cheese to the pizza beyond the optimal level, its sales will decline because customers will not enjoy pizzas that leave them with a mouthful of cheese and little else.

If the pizza restaurant wants to continue to increase its profitability after optimizing the amount of cheese on its pizzas, it might look at increasing a different input, such as pepperoni or sausage, or adding another product, such as chocolate gelato.

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