Return

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Decreasing Returns

Decreasing returns, or diseconomies of scale, occur when a proportional increase in inputs results in a less than proportional increase in output. In this scenario, as production scales up, the average cost per unit of output increases. Factors contributing to decreasing returns may include inefficiencies, coordination challenges, and increased complexity as the scale of production grows.

Related to scale, most critical real-world results are subject to an eventual decrease of incremental value. A good example would be a poor family: Give them enough money to thrive, and they are no longer poor. But after a certain point, additional money will not improve their lot; there is a clear diminishing return of extra dollars at some roughly quantifiable point. The law of diminishing returns often veers into negative territory – i.e., receiving too much money could destroy the poor family.