Theory of the Firm - Explaining the Law of Diminishing Returns

This short topic video explains the law of diminishing returns.

The law of diminishing returns states that as more and more units of a variable input are added to a fixed input, after a certain point, the marginal product of the variable input will begin to decrease.

The concept of diminishing returns is closely related to the marginal cost of supply, which is the additional cost incurred by a producer when they increase their output by one unit. As diminishing returns set in, the marginal cost of supply will increase. This is because in order to produce more output, the producer needs to add more of the variable input (e.g., labour), which becomes less productive as more of it is added.