Giorgio Delgado

Diminishing Marginal Returns To Life

March 4, 2014

Staying on the topic of idea overflow and productivity, I'd like to talk about a basic economic concept.

The concept under the microscope is known as Diminishing Marginal Returns. Wikipedia defines it as follows:

The decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.

In layman's terms this simply means that in some instances, increasing quantity of an input will increase the amount of your output at a decreasing rate. An economist would depict the idea with the following chart:

Diminishing Marginal Returns to Labor

As unrelatable as that still sounds, its actually something that surrounds us all every minute of our lives.

For instance, consider productivity. The whole point of being productive is to achieve some goal, right? If you begin with no goals, you essentially have no cognitive output and one could say you haven't produced anything meaningful (i.e. you haven't learned anything to apply in useful ways). If you then set one goal, and begin applying time (units of labour) towards that goal, you will be infinitely more productive relative to your goalless self. But as you start setting more and more goals, you then begin experiencing Decreasing Marginal Returns because you have exhausted your productive abilities over a wide range of time-consuming goals. As such, you end up not producing anything meaningful.

So one must be aware of such situations in life and realize that quantity is not always quality.

Businesses need to understand this concept also. A business model like Amazon's is exempt from this concept because it's not a capital-intensive company. This means that sales can increase exponentially for amazon, but because it doesn't rely as much on buildings and physical structures to expand sales, then it doesn't experience DMR (at least to the extent of other types of businesses).

This was just a quick glimpse into the world of economics, which most people assume is too theoretical to apply in reality.