Application: Efficient Allocation of Resources

Diminishing returns plays an important part in the efficient allocation of resources. For efficiency, of course, we want to give more resources to the use in which they are more productive. But, as we give more resources to a particular use, we will observe diminishing returns -- that use will become less productive. That may sound frustrating, but in fact it leads to a very important principle we can apply to the problem of efficient allocation of resources. We'll explore this in the next few pages and we will see the same principle again and again in the other microeconomics chapters in this book.