Causes of Diminishing Returns

The main factors that cause diminishing returns are:

• When a given quantity of a fixed factor is combined with successively larger amount of the variable factor, the successive units of the variable factors will get smaller and smaller share in total quantity of the fixed factor to work with them. As many workers share the same fixed factor is not available to the same extent. Thus, an increase in the variable factor would add lesser and lesser to the total output.
• Beyond a certain point, the additional variable factors may not find sufficient work for themselves. As is the case of land, with the increasing pressure of population upon land, a large number of people have become disguisedly unemployed. These people work upon land, but because the land has already exhausted its capacity, the addition made to the total output by the work of these persons is almost negligible.
• The quantity of the fixed factor being given, an increasing the level of production. Therefore, other factors will have to be substituted for this factor. But factors of production are substituted for this factor. But factors of production are not perfect substitutes for each other. Thus, those factors which are substituted for this fixed factor, being only imperfect substitutes, would not work as efficiently as this factor was working. Hence, the possibility of substitution between different factors being limited, inefficiency creeps into production and causes diminishing returns.