L LA W O F

AMENT A
FUND ICS
EC O N OM
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 LAW OF DIMINISHING
RETURNS

The law of diminishing returns is an economic principle

stating that as investment in a particular area
increases, the rate of profit from that investment,
after a certain point, cannot continue to increase if
other variables remain at a constant.
 USE CASES AND
EXAMPLES

The law of diminishing returns

originated in classic economic
theory. It is one of the most
recognized economic principles.
The following are some common
examples of this concept:
SOCIAL MEDIA
MARKETING
A good example of diminishing returns is social
media marketing . While it is tempting to think that
doubling a social media marketing campaign's budget
will double its returns, the increase could easily lead
to a glut of information on a social media channel,
causing the returns to decrease.

To address this problem, a marketing department

should evaluate and adjust other variables, such as
the channels it uses and its approach to social media
monitoring and analytics.
AGRICULTURE

Farming is the classic example of this law. Farmers

usually have a finite acreage of land on which they
can add an infinite number of laborers to increase
crop yields. However, there is a point where an
additional worker produces less of an increase in crop
yields than the last worker added. At this point the
law of diminishing returns has set in and the farm is
less efficient than it was before that additional
worker was employed.
MANUFACTURING

Other production systems follow this same logic.

Adding workers past a certain number to a factory
assembly line makes it less efficient because the
proportional output becomes less than the labor force
expansion.
 ENTERPRISE
RESOURCE PLANNING

In ERP, it is important that organizations establish

the point of diminishing returns -- that is the point
where per unit returns start to drop. By establishing
this point, organizations can set proper expectations
internally and with their customers.
 LAW OF COMPARATIVE
ADVANTAGE

Comparative advantage is an economy's ability to

produce a particular good or service at a lower
opportunity cost than its trading partners. The theory
of comparative advantage introduces opportunity cost
as a factor for analysis in choosing between different
options for production.
 EXAMPLES OF COMPARATIVE
ADVANTAGE

Each make hats and t-shirts. John

makes hats more efficiently, and
Mason makes t-shirts more
efficiently. By calculating each
opportunity cost, John has the
lower opportunity cost. He,
therefore, has a comparative
advantage over Mason.
 ANOTHER EXAMPLE

If two countries can both of them

produce two commodities, corn, for
example, and cloth, but not both
commodities, with the same
comparative facility, the two countries
will find their advantage in confining
themselves, each to one of the
commodities, bartering for the other.
THAN
K YOU