Law of Diminishing Marginal Returns

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DEFINITION of 'Law of Diminishing Marginal Returns'

A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.

BREAKING DOWN 'Law of Diminishing Marginal Returns'

Consider a factory that employs laborers to produce its product. If all other factors of production remain constant, at some point each additional laborer will 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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