Production is 

the process of combining various material inputs and immaterial

inputs in order to make something for consumption.
Inputs are any resources used to create goods and services.
Output is a quantity of goods or services produced in a specific time period.
Cost is the measure of the alternative opportunities foregone in the choice of one
good or activity over others.
Profit Maximization is the short run or long run process by which a firm may
determine the price, input and output levels that will lead to the highest possible
total profit.

What Is the Law of Diminishing Marginal Returns?

The law of diminishing marginal returns is a theory in economics that predicts
that after some optimal level of capacity is reached, adding an additional
factor of production will actually result in smaller increases in output.

For example, a factory employs workers to manufacture its products, and, at

some point, the company operates at an optimal level. With all other
production factors constant, adding additional workers beyond this optimal
level will result in less efficient operations. 

The law of diminishing returns is related to the concept of diminishing

marginal utility. It can also be contrasted with economies of scale.

KEY TAKEAWAYS

 The law of diminishing marginal returns states that adding an additional

factor of production results in smaller increases in output. 
 After some optimal level of capacity utilization, the addition of any
larger amounts of a factor of production will inevitably yield decreased
per-unit incremental returns.
 For example, if a factory employs workers to manufacture its products,
at some point, the company will operate at an optimal level; with all
other production factors constant, adding additional workers beyond
this optimal level will result in less efficient operations. 

Understanding the Law of Diminishing Marginal

Returns

The law of diminishing marginal returns is also referred to as the "law of

diminishing returns," the "principle of diminishing marginal productivity," and
the "law of variable proportions." This law affirms that the addition of a larger
amount of one factor of production, ceteris paribus, inevitably yields
decreased per-unit incremental returns. The law of diminishing marginal
returns does not imply that the additional unit decreases total production,
which is known as negative returns; however, this is commonly the result.

 
The law of diminishing marginal returns does not imply that the additional unit
decreases total production, but this is usually the result. 

The law of diminishing returns is not only a fundamental principle

of economics, but it also plays a starring role in production theory. Production
theory is the study of the economic process of converting inputs into outputs.

History of The Law of Diminishing Returns

The idea of diminishing returns has ties to some of the world’s earliest
economists, including Jacques Turgot, Johann Heinrich von Thünen, Thomas
Robert Malthus, David Ricardo, and James Anderson. The first recorded
mention of diminishing returns came from Turgot in the mid-1700s.1

Classical economists, such as Ricardo and Malthus, attribute successive

diminishment of output to a decrease in the quality of input. Ricardo
contributed to the development of the law, referring to it as the "intensive
margin of cultivation." Ricardo was also the first to demonstrate how
additional labor and capital added to a fixed piece of land would successively
generate smaller output increases.2

Malthus introduced the idea during the construction of his population theory.
This theory argues that population grows geometrically while food production
increases arithmetically, resulting in a population outgrowing its food
supply.3 Malthus’ ideas about limited food production stem from
diminishing returns.

Neoclassical economists postulate that each “unit” of labor is exactly the

same, and diminishing returns are caused by a disruption of the entire
production process as extra units of labor are added to a set amount of
capital.

Diminishing Marginal Returns vs. Returns to Scale

Diminishing marginal returns are an effect of increasing input in the short-run,
while at least one production variable is kept constant, such as labor or
capital. Returns to scale, on the other hand, are an impact of increasing input
in all variables of production in the long run. This phenomenon is referred to
as economies of scale.

For example, suppose that there is a manufacturer that is able to double its
total input, but gets only a 60% increase in total output; this is an example of
decreasing returns to scale. Now, if the same manufacturer ends up doubling
its total output, then it has achieved constant returns to scale, where the
increase in output is proportional to the increase in production input.
However, economies of scale will occur when the percentage increase in
output is higher than the percentage increase in input (so that by doubling
inputs, output triples).