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Law of diminishing returns in a classic economic concept. Though it is really easy to visualize (or feel), it has proven very difficult for economists to really prove.

Lets first discuss what this law is all about. Lets say you want to start a business of selling milkshakes. You purchase all the necessary equipments and raw materials and are ready. A few days later you realize that it takes you about 10 minutes to serve a customer all by yourself. You hire a person to help you. He manages the cleaning of blender and you take care of serving the customers. You see that it takes only 7 minutes for you to serve the customers now. You get creative and hire another person. He takes care of all billing activities and you are free to just take orders and prepare the milkshake. The time to serve the customer reduces to 4 minutes. You are happy. But then you get more creative and hire another person just to take orders. Suddenly the time to serve a customer increases to 5 minutes. You realize that if you now end up adding one more person to the group the serving time will increase to 7 minutes. This is law of diminishing returns.

Law of diminishing returns state that as you add an incremental unit of a certain variable input, there will come a time when adding further units of the variable input (with all other inputs constant) will actually start decreasing the marginal output.

Why does this happen? That is a difficult question to answer but easy to understand. Conflict may be an appropriate word to describe the situation. Because all other inputs are constant, increasing of one particular input creates a conflict and hampers proper interaction between them. In the earlier example it is possible that the space in your shop is limited and continuous movement by 4 people is resulting in a loss of productivity. If you keep adding seeds to a pot, the number of flowering plants that actually grow will increase. But throw a large number of seeds, and there is a conflict and only a few plants actually survive. Over-utilization could be another reason. Taking the same example from above, if the blender keeps running for a long time, it may breakdown occasionally thus bringing down your marginal output. We can see this phenomenon occurring around us as well. Study for an hour, you learn, study for another hour, you learn more. But keep studying long hours and there comes a time, due to fatigue, that your learning comes to a standstill or becomes marginal.

So what is in it for us business folks. If it hasn’t become obvious yet, a LOT.  Every manager, in every capacity, should keep a close tab on this relationship and monitor the productivity of his/her resources. It should be on his dashboard for easy access. With experience, not only will he be able to isolate areas of conflict, overutilization, and fatigue but will also be able to mitigate the problem by either increasing other resources or controlling the increasing resource.

The law is widely used in a number of studies in various disciplines. Search the internet for numerous stories that correlate happenings with this law.