All a Non-Economist Needs to Know about Diminishing Returns

By: Grzegorz Janota

Imagine that you are in a society committee meeting with 15 other members. The only ones who really contribute are the president and officers. The rest of you give only a couple of remarks throughout the whole meeting. Angry and frustrated, you curse over having sacrificed your time for such an unproductive endeavor. This situation surely does not sound unfamiliar. You might have also been wondering about why it may arise. While it is the job of social psychologists to study group behavior, economists can also say a lot about an organization’s productivity.

The scenario above is a case of diminishing marginal returns – a situation in which every additional (or marginal) worker employed is less productive than the previous one. To better illustrate the concept, let’s temporarily leave the society meeting and focus our analytical lens on the functioning of a coffee shop. In a coffee shop there are fixed numbers of coffee making machines and cash registers. Imagine that there is only one person employed – he/she is most likely very productive having to work both the coffee maker and the cash register. If we employ another barista, then possibly the two will specialize, more coffees will be made and worker productivity may even rise. However if we employ more baristas productivity will begin to diminish – there will be three, four or five people using the same equipment and eventually employing an additional worker will not lead to more coffees being made.

Why should you care? Understanding diminishing return will allow you you to appreciate everyday dynamics of the real world, whether it be your next trip to the coffee shop, or your next society meeting. Even when you try to get a perfect score on your exam, your studying efforts exhibit diminishing returns. If you modify the law just slightly – changing “returns” to “satisfaction” – you begin to realize that the logic applies to just about anything.  Finally, our coffee shop analysis allows us to understand the society meeting dynamics in economic terms: With a small number and scope of issues to discuss, getting 15 people to attend a meeting fosters democracy but can be dramatically inefficient.

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