IGCSE Economics Practice Test 2025 – Full Exam Preparation Resource

The law of diminishing returns describes a fundamental concept in economics that illustrates the relationship between input and output in production processes. It states that if one factor of production is increased while other factors are held constant, the incremental output or benefit gained from adding the extra input will eventually decrease.

In simpler terms, after a certain point, adding more of one resource (like labor, for example) to a fixed amount of another resource (like machinery or land) will lead to smaller increases in output. This can be seen in a farming scenario: if you continue to add more workers to a fixed size of farmland, initially, the output may increase significantly. However, as more and more workers are added, the additional output produced per worker starts to decline because they become less effective in utilizing the fixed resources available.

This principle is essential for understanding production efficiency and the limits of how much additional input can lead to proportional increases in output, making it a critical concept in both microeconomics and production theory. The other options do not accurately capture the essence of this law; they suggest scenarios that diverge from the diminishing nature of returns when additional input is applied.