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Think back to the last time you overindulged in a huge, delicious dessert. It’s likely that the first bite was divine, but perhaps ...
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- Find the optimal peak.
Know that ‘more of a good thing is not always better’ ...
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The Law of Diminishing Returns is based on a number of assumptions that are not always relevant to real-world situations. These include:
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No change in technology
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A short period of impact
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Consistent, homogeneous units
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Measurement of product using tangible units.
Each of these assumptions might be challenged in the real world. Technology is always progressing, the units of input are likely going to vary (hiring one person compared to another person will have different impacts) and even the questions of measurement will be more complex beyond the narrow assessment of weight or financial value.
It relies on a static, predictable system which is rarely true or at least has clear limitations when applied to the complexity of reality.
Too Many Cooks.
A useful example to explain this model is to consider a small food truck that sells doughnuts. If that truck has one cook, they might be able to produce 20 doughnuts every hour. Adding one more cook might increase that output to 40 doughnuts every hour. However, adding a third cook might only allow them to produce 45 doughnuts every hour because of the limited space and resources in the truck, and adding a fourth cook might not add any returns at all.
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The concept of Diminishing Returns has a rich and long history, being traced back to economists such as Adam Smith, Jacques Turgot, and Thomas Mathus. The earliest explicit references to this model were in relation to farming outputs and can be attributed to Thomas Malthus and David Ricardo.
My Notes
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