Ricardian Economics - Diminishing Returns

Diminishing Returns

Another idea Ricardo is known for in his Essay on the Influence of a Low Price of Corn on the Profits of Stock is the Law of Diminishing Returns (Ricardo, Economic Essays, Henderson 826). The law of diminishing returns states that if you add more units to one of the factors of production and keep the rest constant, the quantity or output created by the extra units will eventually get smaller to a point where overall output will begin to fall ("Diminishing Returns").

For example, consider a simple farm that has two inputs: labor and land. Suppose the farm has 100 hectares of land and one worker (the labor input). This land-labor combination produces some level of output. If we increase the amount of land, and the amount of labor stays the same, the worker will have to give less attention to each acre of land (if everything else stays the same). So, output might go up, but the additional (marginal) output from adding an acre of land may decrease. If we continue to add more and more land that must be tended by our one worker, we will eventually add so much land that output actually starts to decrease as our worker becomes overwhelmed (that is, less labor time, on average, is devoted to each acre). This is the typical stylized result of increasing one productive input while holding the others constant (versus increasing all inputs, generating economies of scale).