DQ 2.docx - Concept of Diminishing Returns When more units...

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Concept of Diminishing Returns: When more units of variable inputs are employed on a given quantity of fixed inputs, ceteris paribus , the total output increases initially at high increasing rate. After certain level of production, once the company operates at the optimal level, the rate of increase in output with respect to the unit variable input remains constant and finally starts declining. This is the concept of diminishing returns. According to Guell (2012), the law of diminishing returns implies that the rate of productivity starts decreasing after a certain point when an input is gradually increased while keeping other inputs and conditions constant. For example: Let’s assume that the only two variables for a consulting company are the no. of employees and the capital. Let’s keep capital constant and see what happens when we continually increase the no. of employees. At first, up to the point of optimal productivity, the productivity of the company increases with increase in the no. of employees since the work load
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gets distributed, and other inputs like technology, paperwork, client interactions, etc. are utilized
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  • Fall '16
  • Rachlin, Guell

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