The law of diminishing returns has it that as one variable of production continues to increase while others are kept constant, in the long run, the output per unit of the variable in question will at the end of it all decrease. An example is if an organization increases one variable, employees, for example, while other factors such as innovation, machinery as well as raw materials are kept constant, the production of the company will decrease at the end since more capital will go towards salaries while other factors of production do not contribute to any positive change in production.
There are a few ways to know that one is at the point of diminishing returns. First of all, statistical analysis of the different factors of production in the given scenario can be studied to point out the exact point. Through calculation at certain intervals of production, it is possible to realize the trend that the output has in relation to the input.
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Besides the above, graphing the variable in question against the output can help in creating a visual presentation of the developments in each stage of production. When it starts diminishing, it is possible to tell from the shape the graph acquires, one which is opposite of how it was in the beginning.
Marginal Cost of production and Average Variable Cost are the two costs that can be identified. The marginal shift in cost is realized in the total cost of production when a particular item is produced in addition to what was initially being produced. On the other hand, the average variable cost is achieved through the division of the variable cost and the total output.
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy . Cengage Learning.
