Diminishing Returns

Notes

Diminishing returns is the idea that the added value from the next unit is getting smaller and smaller the more we have, and might even become negative. This is opposite to the idea of compounding, where the added value of each additional unit grows.

For example let's look at money. when you have absolutely no money, getting 100$ is the world to you, it changes your life. But when you are super rich, getting another 100$ is practically worthless. Similarly, this can also be the case for the number of friends you have, the number of workers you employ.

But can it be negative you might ask, well imagine food. When you're hungry, a pizza surprise is amazing, but by the 30th slice I think you would prefer to avoid eating more, and any additional slice would actually make you sick. This is similar to the Pareto Principle, that most of the benefits comes from a small subset of what you do/have. The more we add, the less value we get Crowding Out

This also supports Minimalism. Because of the diminishing returns, it is often more useful to dedicate our attention and resources to the very basic things that gives high return, and less on accumulating more and more stuff that eventually leads to negative return. Meaning that not only the added value of every new item is decreasing, but also the gap between a potentially different item that we could invest in rises Alternative cost

Visual

Overview

🔼Topic:: Economics (MOC) ◀Origin:: 🔗Link::