What is the law of diminishing returns?

It’s the principle that adding more of one input eventually produces smaller and smaller extra output. Early units give big gains; later units give less, until more input is barely worth the cost.

What is an example of diminishing returns?

Adding fertiliser to a field boosts yield a lot at first, less with each extra bag, and eventually harms the crop. The input rises steadily while the benefit per unit falls.

How is it different from the Pareto principle?

They’re related. Pareto says a few inputs drive most output (an 80/20 split); diminishing returns describes the falling marginal gain as you keep adding one input. Both argue against over-investing past the high-leverage point.

Diminishing returns

Also called law of diminishing returns · Economics

Diminishing returns is the principle that as you add more of one input, the extra output it produces eventually shrinks. The first unit of effort or resource yields a lot; each later unit yields less, until adding more is barely worth it.

How it works

For any input, track the marginal output — the gain from one more unit — not the total. As that marginal gain falls, you approach the point where additional investment costs more than it returns, signalling time to stop, diversify, or change approach.

How to use it

Knowing when to stop polishing — the last 5% of quality often costs more than the first 80%.
Allocating effort across multiple areas rather than over-investing in one.
Spotting when more spending, studying, or features stops producing proportional gains.

Worked example

Studying for an exam: the first two hours lift your grade a lot; the tenth hour adds almost nothing, and the fifteenth may hurt through fatigue. The input keeps rising while the return per hour collapses.

Where it fails

Mistaking a temporary plateau for true diminishing returns — sometimes a breakthrough lies just past the flat stretch. And some inputs compound rather than diminish; not everything follows the curve.

The deeper point

Its opposite — compounding — is what separates the two great curves of life. The skill is knowing which one you’re on: pour effort into diminishing-returns activities and you waste it; pull out of compounding ones early and you forfeit the fortune.

Frequently asked

What is the law of diminishing returns?: It’s the principle that adding more of one input eventually produces smaller and smaller extra output. Early units give big gains; later units give less, until more input is barely worth the cost.
What is an example of diminishing returns?: Adding fertiliser to a field boosts yield a lot at first, less with each extra bag, and eventually harms the crop. The input rises steadily while the benefit per unit falls.
How is it different from the Pareto principle?: They’re related. Pareto says a few inputs drive most output (an 80/20 split); diminishing returns describes the falling marginal gain as you keep adding one input. Both argue against over-investing past the high-leverage point.

The Pareto principle Opportunity cost Compounding

Editorial synthesis © ReadGlobe 2026, drawing on the mental-models tradition (Charlie Munger, Farnam Street) and the primary sources for each model. · Last reviewed 2026-05-29.