Diminishing returns
Each extra unit of one input, with the others held fixed, adding less output than the one before. It is why accumulating labour or capital alone eventually stops raising growth.
Where you will meet it
Diminishing returns appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Contrast what helps and what holds back economic growth in developing versus developed economies
“Developed economies have strong institutions and deep markets, but high capital per worker means diminishing returns, so their growth rests on innovation at the technological frontier.”
- Explain how spending on human capital, physical capital and technology development feeds economic growth
“Physical capital raises output per worker through capital deepening, and in the neoclassical model its effect on growth fades as diminishing returns set in.”
- Contrast the classical, neoclassical and endogenous theories of growth
“Neoclassical theory, after Solow, says diminishing returns to capital lead to a steady state in which output per worker grows only with exogenous technological progress; a higher saving rate raises the level of output, not its steady-state growth.”
- Explain the convergence hypotheses and judge how well they hold
“The neoclassical model predicts convergence through diminishing returns, while endogenous models need not, and openness speeds catch-up.”
Practise it
Practise diminishing returns until it is automatic: questions that explain every wrong option.
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