The principle that if the amount of labor and other inputs is held constant, then the greater the amount of capital in use, the less an additional unit of capital adds to production is called the principle of diminishing returns to capital.
What Is the Law of Diminishing Marginal Returns?
An economic theory known as the law of diminishing marginal returns states that once an optimal level of capacity is reached, adding more factors of production will really only lead to smaller improvements in output.
For instance, a factory hires workers to produce its goods, and eventually the business performs at its best. If you increase the number of employees beyond this point, operations will become less efficient even if all other production factors remain constant.
In addition to being a central component of economics, the law of diminishing returns also features prominently in production theory. The analysis of the economic transformation of inputs into outputs is known as production theory.
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