In economics, diminishing returns means the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal (ceteris paribus). The law of diminishing returns (also known as the law of diminishing marginal productivity) states that in a productive process, if a factor of production continues to increase, while holding all other production factors constant, at some point a further incremental unit of input will return a lower amount of output. The law of diminishing returns does not imply a decrease in overall production capabilities; rather, it defines a point on a production curve at which producing an additional unit of output will result in a lower profit. Under diminishing returns, output remains positive, but productivity and efficiency decrease.
The modern understanding of the law adds the dimension of holding other outputs equal, since a given process is understood to be able to produce co-products. An example would be a factory increasing its saleable product, but also increasing its CO2 production, for the same input increase. The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory.
