Have you ever imagined that an office of 3×7 meters (house type 21) is occupied by 100 people to do their work? Instead of working efficiently, 100 people would not be able to move freely due to limited space.

The above story is a simple example of economic principles. The rule of diminishing returns Or the law of diminishing returns? What is it? The rule of diminishing returns, and how is the application? Check out the discussion below:

Understand the rules of diminishing returns.

The rule of diminishing returns It’s an economic principle that says that adding a 1 unit inputs (import factor) Continually, the company’s output will decrease if other inputs are not added.

to make it easier to understand Take a look at the following curves:

Fig. 1: The law of diminishing returns.

In the figure above, the factors of production are divided into two simple terms: labor and capital. Simply put, if the number of workers increases by one, while the amount of capital (capital, either land, buildings, or money) remains the same, then the number of workers increases by one. The initial output will increase, however, at some point the amount of output produced will decrease. If you force yourself to increase workers and not increase capital What will happen is that the output value will actually decrease.

The history of this economic principle can be traced back to early economic scientists such as Adam Smith, James Steuart, Johann Heinrich von Thünen and Jacques Turgot. However, it became known more after Thomas Robert Malthus and David Ricardo. This idea was proposed in the 18th century.

At that time, the scientist above was conducting research on the relationship between harvested wheat and corn prices and the quality of the medium-sized soil for cultivation. The study found that the quality of the input soil increases with increasing production costs. As a result, the degree of influence of soil quality on yield (incremental reward) becomes smaller, so at some point, increasing the soil quality will decrease the yield value.

An example of a diminishing return rule.

For example, in the case of a house office in type 21 above, let’s say that the capital is an office building. While labor is office workers. Initially, with a type 21 building and a total of 15 employees, your company can produce 150 units of flowers that can be sold per day.

Because it wants to expand, it therefore finds more workers, until now there are 20 people, still using a 21-type house as a work place. Unfortunately, when assessing the amount of interest that can be sold by employing 40 people, it is reduced to 100 units per day. Asking the staff, the answer is that they cannot arrange more flowers because they cannot move freely.

This means that when you add 1 worker (labor) without increasing the area for operations (capital), the productivity output you get will be reduced. This is where this economic principle comes in.

Procedure of the law of diminishing returns

per 3 stages in The law of diminishing returns That is:

1. The first step

At this stage, total production and incremental production will be increased with an increase of 1 unit of input. For example, when you open a home flower arrangement business type 21 above alone You can arrange only 7 flowers in one day as orders increase. So you need additional workers and hire 2 people.

With the addition of these 2 employees, your company can now arrange 30 custom flower arrangements a day, or an average person can arrange 10 flowers a day. The accrued interest increases) goes hand in hand with the increase in the number of labor and costs (salaries).

2. Second step

in the second step Incremental volume growth is flat. As the total labor and costs increase, for example, you now have 16 employees. However, the number of flowers that can be arranged is 160 each day. That is, overall production growth does not increase due to the addition of 1 person (each worker can only produce 10 flowers per day).

At this stage, all costs are also added up. Let’s say you pay your employees $1,000 per month, which means that initially the salary cost was only INR 3,000,000 for 3 workers, now it’s 5x increased to INR 16,000,000.

3. Third step

In step 3, the inputs increased by 1 unit are actually reduced. labor productivityFor example, you add employees so that your company currently has 17 employees. Instead of being able to provide 170 types of flowers every day, your company can only provide 153 types of flowers.

In terms of overall production, this figure is clearly decreasing. Because in the second stage, the company can arrange 160 flowers every day. The additional production is also reduced. Because employees who were previously able to arrange flowers on average 10 pieces per person became able to arrange only 9 pieces of flowers only.

Limitations of the Law of Diminishing Returns

1. Few practical assumptions

This economic theory is general. In this theory, the factors of production are divided into only two groups: labor and capital. Moreover, this theory assumes that all factors of production are the same.

That is, every worker in one business does the same thing and has no expertise. The same is true of variable capital, which is usually associated with land or buildings. Indeed, capital or capital can consist of many types, ranging from money, property, buildings to machinery and technology. Each capital city has different characteristics. therefore can affect the overall production differently.

2. Not suitable for all industries.

The diminishing yield law is more appropriate to apply to conventional industries such as agriculture, and not to industries using better technology. Because the use of better technology can bring unfair advantage (unfair advantage) to increase total production Not to mention that tech companies are usually constantly innovating.

For example, in the motorcycle taxi industry. The presence of the Internet and online motorcycle taxi applications has made the production integrated. The number of passengers per day) of the online motorcycle taxi business in the beginning increased rapidly compared to basic motorcycle taxis. Because online motorcycle taxi drivers do not need to wait for passengers. Passengers can find the car more easily and can check the price.


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