The law of diminishing returns indicates that as extra units of a variable resource are added to a fixed resource, the marginal product will decline beyond some point. This means that after a certain level of production, adding more of a variable input (like labor or raw materials) to a fixed input (like land or machinery) will result in smaller increases in output.
For example, if a farmer keeps adding more workers to a fixed amount of land, there will come a point where each additional worker contributes less to the total output than the previous one. This happens because the fixed resource (land) becomes overcrowded, and the efficiency of the variable resource (workers) decreases.
It’s important to note that the law of diminishing returns is a short-run concept, where at least one input is fixed. In the long run, firms can adjust all inputs, and the concept of economies and diseconomies of scale comes into play, affecting the firm’s average costs.