Law Of Diminishing, Marginal Utility...

Law Of Diminishing Returns,
 economic law stating that increasing the quantity of one factor of production (such as land, labor, or capital) in a production process will lead to smaller and smaller gains in output. For example, adding an extra person to a factory production line may help increase output by reducing hold-ups at a complicated stage. However, adding another person may not increase output by as much or even at all. In theory, there must be an optimum mix of factors of production for a given business at a given time, though in practice it is impossible to know if it has been achieved.
Diminishing returns are sometimes referred to as diseconomies of scale. They are not a decrease in output. However, over a period of time, smaller and smaller increases in output may lead to decreases in total output. In the example above, if workers were continually added, there would be a level at which the production line would not be able to function because workers would crowd each other and be in the way of the machinery.

Marginal Utility,
 in economics, worth to a consumer of the last unit in a series of similar units of a good that the consumer believes is worth acquiring. The concept of marginal utility is part of the “law of diminishing utility.” According to this law, possession of added units of a commodity increases the total psychological satisfaction or utility of the possessor, but with each successive unit total utility grows at a slower rate as the ability to enjoy each successive unit becomes less keen. A point is finally reached beyond which no further effort at acquisition will be deemed worth making.

This concept is significant because prior to its application in classical economic theory, economists believed that cost of production was the sole or principal determinant of the market value of goods. Such an approach was finally considered inadequate by most economists because it failed to give sufficient weight to such factors as investment or capital charges, difference in value between different kinds of labor, and the subjective factors that determine individual demands for a commodity. With the recognition of these subjective factors, of which the point of marginal utility is one of the most important, economists realized that the value of labor and capital themselves is partly determined by the demand of individuals for the commodities in whose production those factors are applied. In other words, although the actual labor and capital cost of a commodity may ensure for the moment that it will not be sold for a price below cost, even if no buyers can be found to pay the cost price, in the long run such a lack of demand will force a reduction in labor and capital costs in order to lower the price down to the point at which an effective demand will be found.

Cost operates only as one of a number of interrelated factors in determining market value and is itself affected by these other factors. Similarly, the subjective attitudes of individuals toward commodities in the market cannot alone determine market values, but must be considered in relation to the actual prices paid for labor and capital, and in relation to the points of marginal utility for all the other individuals currently in the market. Each purchaser, in other words, makes purchases according to an adjustment between her or his own valuations of commodities and those that prevail in the market, and the valuations that prevail in the market are the result of balances of all the valuations of all the individual purchasers in the market at that time.