Law Of Diminishing Marginal Productivity

Loading the player...

What is the 'Law Of Diminishing Marginal Productivity'

The law of diminishing marginal productivity is an economic principle that states that while increasing one input and keeping other inputs at the same level may initially increase output, further increases in that input will have a limited effect, and eventually no effect or a negative effect, on output. The law of diminishing marginal productivity helps explain why increasing production is not always the best way to increase profitability.

BREAKING DOWN 'Law Of Diminishing Marginal Productivity'


As an example, let’s consider a pizza restaurant that wants to increase profitability. Increasing the amount of cheese (the input) that goes on each pizza can create a more delicious product and sell more pizzas. But at some point, the pizza reaches an optimal cheese level. The amount of cheese must be balanced with the crust thickness, amount of sauce and other pizza toppings, if any. If the restaurant continues to add more cheese to the pizza beyond the optimal level, its sales will decline because customers will not enjoy pizzas that leave them with a mouthful of cheese and little else.


  1. Law Of Demand

    A microeconomic law that states that, all other factors being ...
  2. Consumer Theory

    Investopedia explains: The study of how people decide what to ...
  3. Efficiency Variance

    The difference between the theoretical amount of inputs required ...
  4. Law of Diminishing Marginal Returns

    A law of economics stating that, as the number of new employees ...
  5. External Diseconomies Of Scale

  6. Productivity

Related Articles
  1. Markets

    Law Of Diminishing Marginal Productivity

  2. Markets

    Can Pizza Deliver You Good Returns ?

    Americans love pizza regardless of economic conditions. Should you consider the following pizza stocks?
  3. Markets

    Pizza Hut, Domino's Taking Orders Via Social Media

    Little Caesar's, the pizza company that prides itself on making your pie before you order it, has commercials that lament the difficulty of ordering via app or website. It's a pretty silly marketing ...
  4. Markets

    Explaining Economies of Scope

  5. Markets

    A Practical Look At Microeconomics

  6. Markets

    What Is The Difference Between Comparative Advantage And Absolute Advantage?

    When a nation can make a product at a higher quality and faster rate than another, it has an absolute advantage.
  7. Markets

    Yum!'s Pizza Hut Jumps Into the Discount Combo War

    This has been the year of fast-food meal deal discounts. Pretty much every burger chain has some variant on a $4 or $5 offer where consumers get a sandwich, a second meal item (like chicken ...
  8. Markets

    Is Domino's No-Click Ordering a Game-Changer?

    Little Caesar's, a privately held pizza chain, runs national commercials where people openly lament the difficulty of ordering a pizza. Apps are too hard to use, phones present problems, and ...
  9. Markets

    Operating Profit

  10. Markets

    T-Mobile Tuesday Promotion "Breaks" Domino's

    A free pizza promotion proved so popular that T-Mobile (NASDAQ: TMUS) customers overwhelmed Domino's (NYSE: DPZ) capacity. That's pretty impressive, given that Domino's literally runs commercials ...

  2. How does the law of diminishing returns affect marginal revenue?

  3. To what extent can fast food restaurants like McDonald's pass along rising input ...

    Learn what input prices consist of. Understand to what extent a fast-food restaurant like McDonald's can pass along rising ... Read Answer >>
  4. How is productivity calculated?

  5. What is the difference between comparative advantage and absolute advantage?

    Understand the difference between absolute and comparative advantage and how these concepts shape international trade by ... Read Answer >>
  6. Does the law of diminishing marginal returns only apply to labor?

Hot Definitions
  1. Duration

  2. Dove

  3. Cyclical Stock

  4. Front Running

  5. After-Hours Trading - AHT

  6. Omnibus Account

Trading Center