Easy way to explain Diminishing Marginal Returns

November 3, 2005 - Get free updates of new posts here

I really love meat! What does that have to do with Diminishing Marginal Returns (DMR)? GOOOOOood question. It has everything to do with it. Here are some examples of (the law of) diminishing returns:

Have you ever eaten a steak at Denny’s? How would would you rate the meat there, not the best huh. The cost $10

How do you like eating Outback Steakhouse New York steak? Really tasty at an affordable price, ~$25

What about Ruth Chris, Alexander‘s or a fancy steakhouse steak? Would you say the taste is better? I am guessing you would say it tastes much better. The cost $50

Whiteboard with Law of Diminishing Returns

And then you go to Masa where you are forking out $150+ for some fancy Kobe Japanese meat.

So this brings us to what is Diminishing Marginal Returns. When you go from Ruth Chris steak to Masa, the amount of money you are paying does not justify the steak since the quality is not going to be that much better. The type of meat you can get cannot get that much better or worth it after a certain point. It is still meat from a cow and there are only so many ways you can tenderize that meat. If you want to talk more about econ terms you’ll find me scarfing high-quality In-n-Out Burgers.

Figure out what you really get value out of and if you can add more value by doing something new and different.

Note: This theory applies to so many things. Think about Taco bell. How many different ways can they make a taco?

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8 responses to “Easy way to explain Diminishing Marginal Returns

  1. Sean Reply

    huh? Your diagram is flat wrong – it doesn’t illustrate diminishing MU, it demonstrates NEGATIVE MU. The quality of steak doesn’t DECREASE between $50 and $150, it just increases at a slower rate…

  2. Noah Kagan Reply

    Hey Sean,

    I think this graph/explanation do agree with your statements. The graph displays the marginal qualities and your point is completely shown here where the Masa steak is great but the marginal improvement from Ruth Chris is at a lower rate. Hence there is a diminishing marginal rate from Ruth Chris to Masa relative to price.

  3. Sean Reply

    No, your Y-axis is labeled “Quality” and Masa steak is shown with a lower Y value indicating not that quality/dollar has decreased but that the ACTUAL QUALITY has decreased. This is not diminishing marginal returns but actually negative marginal returns which violates monotonicity (the fundamental principle that “more is better”).

    To repeat, your graph shows that the ABSOLUTE quality of Masa steak is lower than Ruth Chris, not RELATIVE quantity/dollar. To illustrate what you were trying to show, Masa should have had a higher Y-value, but your curve should have had a positive first derivative and a negative second derivative.

  4. Noah Kagan Reply

    Okay let’s just say I am dealing with a new way to look at diminishing marginal return and we can all it diminishing quality relative to price from now on. yes i know the definition and that dmr deals with inputs and value not the quality of an item. I wrote this piece more about the idea of how the value of things decline relative to price as you get higher.

  5. My Boaz's Ruth Reply

    Actually, my husband and I have determined that Ruth Chris’s steak is NOT worth the price.

    We find the best quality for the price on steak is at Jimmie Mac’s Steakhouse. Ruth Chris’s steak does not taste at all better, and is a LOT more expensive.

  6. Chan Wai Hai Reply

    I would be glad that you have the time and spirit to make this web page to show us what the ‘diminishing returns’ is. However, I cannot find any convincing calculation and just find several native style firms that we cannot clearly understand the theory of the diminishing returns the stuff is ! I hope you spend more time on the reading and in quotation from different scholars to show the specific terms. The sustainable inputs (eg. Labour, equipments scale, land etc. ) can have the greatest output(s) by the plan with the concept “Least-Cost Factor Combination For A Given Output” . Most people who have ever studied economy realize the stuff of this economic terms. I hope you can explain more by your text or the diagrams to the people who don’t know Economics!