A Fight against Law of Diminishing Returns

By: Anamitra Roy

B.Com. (Hons.) [University of Calcutta], Certified Financial Accountant (CMC), DFA (CMC), PGDBF (HSIS India), Certified Financial Accountant (GLOBSYN Skills), GPBL (TASMAC & University of Wales).

 Basic Concept:

Classical economists like Robert Malthus and David Ricardo gave shape to the Law of Diminishing Returns. The concept is a very simple one. Say, a consumer has consumed a bottle of a soft drink. The satisfaction generated from the consumption of it comes to 10 units. This satisfaction level is expected to go down with the consumption of every additional unit of the soft drink and at one point of time the satisfaction level will reach the zero mark. This is basically the concept of the law of diminishing returns. Here, the expression “satisfaction derived” is treated synonymously as “utility value”. Below is drawn a chart showing the decline in the satisfaction level with the consumption of one additional unit of the commodity.

Chart 1:

Number of Units Consumed

Units of Satisfaction derived from consumption

1

10

2

9

3

8

4

7

5

6

6

5

7

4

8

3

9

2

10

1

11

0

 Non- technically speaking it can be put this way that due to fatigue, monotony of use of the same commodity for a long time, arrival of superior quality products in the market etc, after a certain time the satisfaction derived from the use of the same will be nil. This is a simple natural law which all of us have experienced at some point of time in our lives.

The Problem:

In reality it was seen that due to the influence of the law of diminishing returns, after a point of time the sales figures of products come down. That impacts profit accumulation, the fund flow, the working capital, the meeting of daily expenditures and staff motivation. So there is a need to tackle the adverse effects of the law of diminishing returns. This can be done by not lowering or keeping constant the satisfaction derived from consumption of an additional unit of the commodity. The same can also be ensured by slackening the rate of lowering of the satisfaction derived from the consumption of an additional unit. Graphically it can be represented as follows:

Chart 2: (case of not lowering or keeping constant the satisfaction derived from consumption of an additional unit of the commodity)

Number of Units Consumed Units of Satisfaction derived from consumption
1 10
2 10
3 10
4 10
5 10
6 10
7 10
8 10
9 10
10 10
11 10

 

Chart 3: (case of slackening the rate of lowering of the satisfaction derived from the consumption of an additional unit)  

Number of Units Consumed Units of Satisfaction derived from consumption
1 10
2 10
3 10
4 9
5 9
6 9
7 8
8 8
9 8
10 7
11 7

Solutions:

In reality this is done by using the various specialized branches of business management by the following ways:

> Role of HRM in fight against the Law of Diminishing Returns:

 Staff motivation is a key to the fight against Law of Diminishing Returns. It is with the help of a motivated work force that improvements can be ensured in the operations process, product designing, planning and implementation of the business plans. A HR manager has to ensure the motivation of the staffs of the enterprise by the following ways:

  • Making the staffs feel that they are an integral and important part of the organization through continuous counseling.
  • Recognition of the contributions of the staffs through monitory rewards, promotions in the organizational hierarchy etc.
  • Maintaining coordination between the various branches of the management through the designing of multi directional internal communication system.
  • 360 degrees performance appraisal.

> Role of Finance Management in fight against the Law of Diminishing Returns:

In order to bring in new advance technology and other factors of production like land, labor, capital etc. funds may be required. It is the finance manager’s responsibility in a modern day enterprise to anticipate

  • When and how many funds will be required through a study of the time value of money and maintenance of depreciation.
  • From which source to bring in these funds through capital gearing.
  • Whether to use “cost cut off” as a tool to generate funds through analysis of cost sheets, process costing, job costing etc.

> Role of Marketing Management in fight against Law of Diminishing Returns:

 A marketing manager may aim to fight against Law of Diminishing Returns by the following ways:

  • More vivid highlighting of USPs of the product in the advertisements.
  • Usage of CRM so that customers and clients can be served as per their tastes and preferences.
  • Usage of publicity matters as reminding agents like hoardings, banners etc.
  • Collection of feedback from the market about the areas of the product where improvement has to be brought in.

> Role of Strategic Management in fight against Law of Diminishing Returns:

  • Collection of information about improvements being brought in by competitors.
  • Collection of information about arrival of substitute goods in the markets, their pricing and marketing strategies.
  • Analysis of the consumer behavior to detect if any changes are creeping in the tastes, preferences and buying patterns of customers.

Conclusion:

In conclusion it has to be pointed out that keeping the satisfaction derived from usage of one additional unit of the output constant or not lowered cannot be achieved in the long run. Therefore, all the measures suggested for a fight against Law of Diminishing Returns are targeted at

  1. Not lowering or keeping constant the satisfaction derived from consumption of an additional unit of the commodity in the short run.
  2. Slackening the rate of lowering of the satisfaction derived from the consumption of an additional unit both in the short and long run.
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