Give a examples of law of diminishing returns?

Answer 1

The law of diminishing returns, a widely accepted premise in economics, simply states that there is a point beyond which production is not increased proportionally to input, and eventually might even began to decrease.

A ridiculously simple example is as follows:

You have a factory with one machine making doo-dahs. This machine is run by one person who can produce 30 doo-dahs per hour, but based on the machine's cycle time of 1.5 minutes, should be able to produce 40/hour. The problem is the person cannot get the materials ready in 1.5 minutes, but needs 2 minutes, and so the machine sits idle .5 minutes each cycle.

So, you hire another person, presuming that two people will produce twice as many as one, but you do not buy an additional machine. The most you can produce is 40/hr. (which two people can accomplish) but you cannot double production because the machine still needs 1.5 minutes to complete a cycle.

What you have accomplished is to actually reduce the output (cost-wise, at least) from 30 pieces per person-hour, to 20 pieces per person-hour, even though you are producing a total of 40 pieces per hour.

If the cost of the extra person is negligible compared to the selling price of the extra doo-dahs, you might still be better off. But if the extra labour cost outweighs the extra income, you will be worse off than before.