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Economics

What is the 'Law of Increasing Return'?

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November 24, 2014 7:37PM

Assuming this is pertaining to economics or technology and not some other scientific field:

The much more popular concept is the "law of diminishing return", which states that beyond some point, each additional unit of variable input yields less and less additional output. A simple example: Let's say you have a factory with a fixed physical size making a fixed product. If you add one employee to the factory, you'll expect an increase in x of units produced. However, if you add 100 employees, instead of an increase in 100*x in units produced, it will be less than that. This is because eventually the new employees will become overcrowded in the factory and have nothing to do since the factory's machines are already being used at peak efficiency, therefore for each new employee added you're getting less "bang for your buck" (lower marginal returns).

The "law of increasing returns" would imply just the opposite, that each additional variable added leads to a disproportionately high return. The law of diminishing returns is much more widely-known and is thought to be a near-universal law. There's a lot less research material available in terms of the law of increasing returns, however there are cases where it could hold true. The example listed on Wikipedia is of fax machines - adding one fax machine will create x in return, however adding 2 fax machines means that they can communicate and therefore increase return higher than would be possible by just 2*x, and marginal returns would be even higher for adding more fax machines.

For more on diminishing returns, and a short section on how increasing returns are possible but by no means a universal law.