The law of diminishing returns comes into interaction with another economic principle - an increase in imputed costs. It determines how the costs of production factors, resources and the output of goods and services will be related to each other. First of all, it is taken into account how an increase in costs will affect the quantity of products that are manufactured. And this provided that other factors remain unchanged.
This is clearly seen in the following example. Four hundred units of a product are produced using several factors acting in combination. The number of employees was originally equal to two hundred. You can trace what the gradual build-up of this factor will lead to (without changing the rest), each time increasing the number of employees by twenty people. It will become clear that increasing the resource does not contribute to the growth of output, and hence income, but, on the contrary, slows down its pace. Labor productivity , its performance behaves in the same way - is falling. This is how the law of diminishing returns works.
The reason for this effect is quite obvious. The ratio between production resources should always be maintained, since they work well only in combination. As a rule, initially all factors are agreed among themselves. Naturally, when one of them increases, while the rest remain fixed, a disproportion arises. And in such conditions, when other resources (for example, a sufficient amount of equipment, space, etc.) do not correspond to an increase in the workforce, there can be no question of full profit.
In general terms, the law of diminishing returns has the following wording: "The growth of output of a certain type of product due to an increase in one factor, while the others are fixed, gradually decreases."
There is one feature that previously has not been emphasized. The growth in product output does not fall immediately after one factor has been increased. At first, if the ratio of resources is not violated, there may even be an increase in productivity. But this does not last long. Beginning with a certain volume of output of goods, imbalances are violated, and the law of diminishing productivity comes into force. If you look at the big picture, then this process is as follows: the return of one type of resource always depends on its cost or quantity. And this provided that other factors remain unchanged.
There are indicators such as average and marginal returns. The latter shows how the growth of output and the increase in resource relate to each other. The average defines how the volume of goods that are produced is correlated with the costs that this issue caused.
And this means that the law of diminishing returns will come into force only when the costs have reached such a value that will correspond to the most rational combination of factors. What happens if the costs increase a little? In this case, the average return is equal to the maximum and reaches its maximum.
Considering the law of diminishing marginal returns, one cannot avoid operating with such a concept as "marginal (marginal) values." They are also called relative increments. The marginal value of an indicator in an economy is its increase, due to a change in the factor affecting it by one unit only. That is, the marginal product is the growth of its production due to the fact that another unit of the factor influencing the output is used. In our case, an additional resource.
So, the law of diminishing returns suggests that increasing the use of one factor in order to increase the result, one must not forget that the effect also depends on the ratio of the resource that is involved in the turnover with others, and not only on its size.