Chime® is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.

What Is the Law of Diminishing Returns?

Chime Team • July 10, 2024

Easy online banking

  • Checking Account with no monthly fees
  • 50,000+ fee-free ATMs~
  • Chime Visa® Debit Card
Get Started

Law of Diminishing Returns

The law of diminishing returns is the theory that once an optimal level of production is reached, adding more of one factor of production will actually lead to less efficiency. It’s like squeezing a lemon. Initially, you get a lot of juice with little effort, but as you continue, you have to exert more force for every additional drop.

Understanding the law of diminishing returns is important because it highlights the balance necessary for resource allocation. For example, if a factory hires more workers without increasing its machines or workspace, the productivity per worker will likely decrease after a certain point.

You’ve likely experienced this principle in action when studying for an exam. For the first few hours, you’re highly productive. Then, after a certain point, fatigue sets in. With every additional hour of study, it becomes more difficult to keep your focus and retain information.

Or think about when you’re eating a sweet treat. That first piece of cake or bite of ice cream tastes so good. Maybe the second round does, too. At this point, you’ve satisfied your craving, and still feel good. But, after the third or fourth piece of cake, when you’ve eaten too much, you get a stomachache and start to feel sick.

The law of diminishing returns highlights that more is not always better. This concept is useful in many areas of life, including:

  • Business: It helps businesses optimize their production processes by identifying the most efficient level of input.
  • Investment: It also guides investment decisions by indicating when it’s more beneficial to diversify resources rather than continuing to concentrate them in a single area.
  • Personal: Understanding this principle can help people make better decisions about how they invest their time and resources in their personal and financial lives.

The impacts of the law of diminishing returns extend to the economy as a whole. It influences how economies scale production and manage resources, affecting labor markets, investment strategies, and overall economic growth. Economies that understand and adapt to this law can make more efficient use of their resources, leading to more sustainable growth and development.

To improve finances with this concept in mind, individuals and businesses alike should strive for balance in resource allocation. Knowing when additional investments yield diminishing returns can help decide when to diversify efforts or seek alternative growth strategies.

The value of this principle is being able to recognize the optimal point of investment in any area, whether it’s time, money, or resources, to maximize returns without wasting effort on minimal gains. This understanding is crucial for businesses and invaluable for people seeking to optimize their personal and financial efforts.

Easy online banking

  • Checking Account with no monthly fees
  • 50,000+ fee-free ATMs~
  • Chime Visa® Debit Card
Get Started

Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

While Chime doesn’t issue personal checkbooks to write checks, Chime Checkbook gives you the freedom to send checks to anyone, anytime, from anywhere. See your issuing bank’s Deposit Account Agreement for full Chime Checkbook details.

By clicking on some of the links above, you will leave the Chime website and be directed to a third-party website. The privacy practices of those third parties may differ from those of Chime. We recommend you review the privacy statements of those third party websites, as Chime is not responsible for those third parties' privacy or security practices.

Third-party trademarks referenced for informational purposes only; no endorsements implied.

‡ SpotMe® for Credit Builder is an optional, no interest/no fee overdraft line of credit tied to the Secured Deposit Account. SpotMe on Debit is an optional, no fee service attached to your Chime Checking Account (individually or collectively, “SpotMe”). Eligibility for SpotMe requires $200 or more in qualifying direct deposits to your Chime Checking Account each month.

Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

~ Out-of-network ATM withdrawal and over the counter advance fees may apply except at MoneyPass ATMs in a 7-Eleven, or any Allpoint or Visa Plus Alliance ATM.

Address: 101 California Street, Floor 5, San Francisco, CA 94111, United States.

No customer support available at HQ. Customer support details available on the website.

© 2013-2024 Chime Financial, Inc. All rights reserved.