In formal economic terms, the law of diminishing marginal returns states 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.Let’s use the law of diminishing marginal returns to analyze Leo’s Custom Guitar Shop.  Leo is the sole employee and can build one custom-made guitar per month.  But Leo’s guitars are highly prized and he could sell more than 12 per year.  Leo hires an employee and trains her to make his guitars.  Now Leo can sell two guitars per month and thus double his sales.  Leo can continue adding employees and increase his sales, but at some point Leo will run out of space in his guitar shop. There is only room for Leo and three other employees in the shop.  Output is now four guitars per month.  Adding a fifth employee will make the shop overcrowded.  Leo and his employees will no longer be able to each make one guitar per month in the crowded shop, and thus the return on adding a new employee has diminished.