What does the Law of Diminishing Returns state?

The Law of Diminishing Returns refers to the principle that, when adding more of one factor of production, while keeping other factors constant, the incremental output or returns derived from each additional unit of that input will eventually decrease. This concept is pivotal in agricultural economics as it helps to understand how to allocate resources effectively.

For instance, if a farmer continues to add fertilizer to a fixed plot of land, initially, the crop yield may increase significantly. However, after a certain point, each additional unit of fertilizer contributes less to the yield compared to the previous units. This decline in additional output per input is the essence of the Law of Diminishing Returns.

In contrast, the other options misunderstand or misinterpret this fundamental principle. For example, stating that all inputs must increase for production to rise implies that only a simultaneous increase in all resources can yield higher outputs, which doesn't accurately reflect the dynamics of production adjustments. Similarly, suggesting that production can continue to rise indefinitely contradicts the core idea of diminishing returns, as it ignores the limits imposed by resource constraints. Lastly, the assertion that input costs have no effect on production returns overlooks the economic realities of how resource allocation and cost management can significantly influence agricultural productivity.