What does diminishing marginal returns look like on a graph?
Diminishing marginal returns begins where the marginal product curve peaks and starts falling. On the total product curve, that is where total product keeps rising but at a slower rate, so the curve bends from getting steeper to getting flatter. Marginal cost starts rising at the same output.
The law of diminishing marginal returns is a short-run idea: at least one input, such as the factory or its machines, is fixed, and a firm adds more of a variable input, usually workers. It shows up on two production graphs drawn with the number of workers on the horizontal axis. The top graph has total product (TP) on the vertical axis, and the bottom graph has marginal product (MP) and average product (AP).
Here is a table to plot. With 0 to 7 workers, total product is 0, 8, 20, 30, 36, 39, 39, and 37 units. Marginal product, the change in total product from each added worker, is 8, 12, 10, 6, 3, 0, and -2. The second worker adds more than the first, so returns are increasing at first. From the third worker on, each worker adds less than the one before (12, then 10, 6, 3, 0). Diminishing marginal returns sets in with the third worker.
On the total product graph, the curve rises steeply and gets steeper through the second worker, then keeps rising but flattens out: 10 more units, then 6, then 3. The point where it switches from getting steeper to getting flatter is the inflection point, and that is where diminishing returns begins. Total product peaks at 39 units, where marginal product reaches 0, and falls to 37 when the seventh worker has a marginal product of -2, the point where workers crowd the fixed space and get in each other's way.
On the bottom graph, marginal product forms an upside-down U: it rises to its peak of 12 at the second worker, falls from there, crosses the horizontal axis at the sixth worker, and goes negative at the seventh. Average product (total product divided by workers) is 8, 10, 10, 9, 7.8, 6.5, and about 5.3, and the marginal product curve cuts through it at its highest point, where the third worker's marginal product of 10 equals average product of 10. The total product vs marginal product comparison shows how the two curves line up.
The same law shapes the cost graph. With a wage of $60 per worker, marginal cost equals 60 divided by marginal product: $7.50 per unit for the first worker's output, $5.00 for the second, $6.00 for the third, $10.00 for the fourth, and $20.00 for the fifth. Marginal cost bottoms out exactly where marginal product peaks and rises as marginal product falls, which is why the MC curve is shaped like a U, or a check mark. Practice the arithmetic with the marginal product calculator and see the U-shaped MC curve, with ATC and AVC, on the production costs sandbox.
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Related questions
- Does diminishing marginal returns mean total product is falling?
- No. Diminishing marginal returns means each added worker adds less than the previous one, while total product is still rising. Total product only falls once marginal product turns negative, which is a separate and later stage.
- Where exactly does diminishing marginal returns begin on the graph?
- At the peak of the marginal product curve, which lines up with the inflection point of the total product curve. It does not begin where total product peaks or where marginal product crosses zero.
- Is diminishing marginal returns a short-run or long-run concept?
- Short run. It requires at least one fixed input. In the long run every input can change, so the matching idea is returns to scale; a long-run average cost curve that rises with output shows diseconomies of scale. The [short run vs long run](/glossary/short-run-vs-long-run) entry covers the difference.