Narrator: Now listen to a talk in an economics class.

Professor: The law of diminishing returns is perhaps the most famous and recognized of all economic concepts or “laws.” Depending on whom you talk to, it could be called by several different names: diminishing marginal returns or law of increasing opportunity costs. It essentially means that as you increase input, add more and more resources to the production, your output will increase by less and less. The output will still increase, but by less and less as you add to your production or input. Let me give you an example…Say you own a pencil factory. Now, it is a very basic factory. You have people make the pencils by hand. There are 10 rooms in your factory and there are 10 people in each room making pencils for you. Let’s say each person can make 100 pencils every day. Well, you want to hire more people so they can make more pencils. It makes sense, right? So you slowly start to hire more and more people. In some offices you have twenty or thirty people making pencils now, but the employees can’t all make 100 pencils every day anymore. In some of the rooms, there just isn’t enough room to work efficiently. It gets more and more crowded. If you keep adding more people to each room, there will be less and less space for employees to work; so, they will go slower and slower. At first, each employee had plenty of space to work and could make 100 pencils. But now, they keep bumping into each other, and each employee can only make 60 or 70 pencils each day. After a while, adding another person doesn’t mean that they will be able to make 100 pencils thanks to the law of diminishing returns.

Narrator: Now get ready to answer the question.

 <<<<<<<<<<<<<<<<<< Answer

The law of diminishing returns says that as input increases, output will increase by less and less. The output will still increase, but it is not proportional to the input. Umm, if there is a pencil factory and you have 10 workers in a small room, each person can produce 100 pencils in a day…that’s 1000 pencils a day. If you add another person, that makes 11, maybe there would be too many people working in that area and it would affect production. All 11 employees will still be able to produce more than 1000 pencils per day, but not 1100 like the math would suggest. All the people can still produce more pencils overall, but it is not proportional.