What occurs when a firm experiences diminishing marginal returns?

When a firm experiences diminishing marginal returns, it means that as it increases the quantity of one input (while keeping other inputs constant), the additional output produced from each successive unit of that input begins to decline. This phenomenon occurs after a certain point when the optimal combination of inputs has been exceeded.

For instance, consider a scenario in a factory where a manufacturer adds more workers to a fixed amount of machinery. Initially, each new employee might substantially increase the overall output. However, as more workers are added, the benefit of each additional worker in terms of output begins to diminish. They might start to get in each other's way or run out of equipment to work with, resulting in a situation where each new worker contributes less to total production than the previous one.

This concept of diminishing marginal returns is a fundamental principle in production theory, crucial for understanding how firms make decisions about resource allocation and input usage.