Learn About the Law of Diminishing Returns in Economics: History and Examples

Written by the MasterClass staff

Last updated: Aug 26, 2021 • 4 min read

When building a successful business, you might assume that adding more employees, equipment, or work space will either increase your ability to manufacture your product, or reduce the average cost of production. In reality, however, there are limits to how much your business will benefit from this method. In fact, in some cases, an increase in manpower or machinery can actually lead to a decrease in production. This is phenomenon is known as the Law of Diminishing Returns, and it’s key economists’ understanding of supply and demand, as well as how prices and wages are determined.