Diminishing Returns and Economics

Too much of anything is always toxic. We always seek to leverage and obtain the best marginal utility available in everything we do. Yet, there comes a moment when returns leave the accelerating phase and enter the decelerating phase, eventually leading to a loss. In this conversation, I'll go through the law of diminishing returns in terms of studies, the complexities of closing down a business in a profitable market, and rival threats from a low-cost leader.

Studying is a necessary prerequisite for passing exams and gaining sufficient knowledge to succeed in numerous sectors in life. When you are really thirsty, taking four glasses of water would suffice to quench the thirst. However, it is only the first two glasses that are helpful to the individual. Past the second one, the utility of the glass of water diminishes, with the third one yielding less satisfaction. The fifth glass may lead to negative effects as we progress towards water intoxication. The same occurs in studies. There is a saturation point, which when crossed, may derail the studying individual.

One of the demerits of studying too much is the negative effects accrued to mental health (Bracke, Pattyn & Knesebeck, 2013). Education is essential in generating well rounded individuals. Over studying, tends to lead to less co-curricular participation due to the time spent alone studying. This leads to stress episodes, as well as frequent burnouts and reduced happiness levels. This is characterized by insomnia and appetite changes. If I were to find myself at a point of insomnia, I would definitely understand that I am at the point of diminishing returns. It is such pressures and over emphasis on education that has led to high suicide levels that have been seen among teenagers in Korea, where high school students pressured with making it to higher level education facilities seek it as an alternative to deal with stress (Jeon, Bae & Woon, 2013).

The price of land is an important determinant to whether a hotel business will survive or not. The value of land determines a lot on the nature of clients around a business, as well as the nature of the business environment. An increase in the price of land will lead to an increase in the price of housing around that area. Location is one of the key elements involved in pricing houses when it comes to real estate, thereby an increase in the cost of land will lead to an increase in the pricing of houses at any given area (Wu, Deng & Liu, 2013). This would in turn lead to the housing becoming less affordable, something that would cut down on the population’s spending power. This would, in the long run, lead to less luxury spending, cutting down on the hotel’s profits.

There are various types of costs that may force a company’s management to consider shutting down. These occur in the form of various expenses that may overwhelm a company by depleting the profit margin, or even extending into making losses. Such costs can be divided into two groups; direct and indirect costs (Bodie, 2013). Direct costs are those which can be easily predicted, calculated and determined, as they are directly involved in the business, for example, the cost of buying equipment for a hotel. Indirect costs on the other hand, are those costs which occur as overheads and cannot be easily predicted or budgeted for beforehand.

Costs could also be fixed or varied (Bodie, 2013). Fixed costs are those which are permanently arrived at and do not change with regard to the level of productivity of the company. For example, the cost of electricity is usually a fixed cost, in that it is fixed to a certain price, whether power is consumed or not. Variable costs, on the other hand differ from fixed costs in that they are subject to the level of operation a company is involved with. Such costs include but are not limited to wages, fare invoices, and so on. Mixed costs, on the contrary, are those which can be easily determined beforehand, but vary with regards to the level of operation of an institution, for example, advertising costs. If these costs exceed the company’s profit, a decision to shut down may have to be made.

One of the means through which companies survive as monopolies is by adopting the low price mechanism. Based on the resources at their disposal, companies may lower prices so as to attract more customers, a technique that is ideal for huge corporates, which strangle medium sized and small companies.

Taking an example of China’s ETS, the low price mechanism has been used so as to establish various parastatals and maintain them (Qi & Wang, 2012). This type of pricing is ideal with the customer, as capital and purchasing power is always a constant limited factor. The customers will then prefer these low priced products by the company, which definitely has enough resources to sustain the low economy turnover. This could be perceived as a threat by the other competitors, as they would have to dig deeper and produce really high quality products so as to counteract the threat, as it would be impossible to use the same pricing as it would lead to losses.

The low pricing mechanism is also used in order to reach out to more customers. Look at it this way. A group of companies is selling scratch cards for prepaid telephone services at $10 fixed price. Only a tenth of the population may be able to afford to buy these recharge cards at that rate. However, almost half of the population can afford buying daily recharge cards at $1 per day. In this case, selling the cards at $1 is cheaper for a given set, as compared to $10, but will reach to a bigger clientele, as compared to the latter. This will translate into more sales and a bigger turnover. Some companies, such as Safaricom Limited in East Africa, used this approach so as to broaden their clientele.


Bracke, P., Pattyn, E., Knesebeck, O. (2013). Overeducation and depressive symptoms: Diminishing mental health returns to education. Sociology of Health & Illness, Vol 35(8), 1242-1259.

Bodie, Z. (2013). Investments (10th ed.). New York, NY: McGraw-Hill, 2013. - 1080 p.

Jeon, H. J., Bae, J., Woo, J. M. (2013). Recent statistics and risk factors of suicide in children and adolescents. Journal of the Korean Medical Association, 56(2), 93-99.

Qi, S., Wang, B. (2013). Fundamental issues and solutions in the design of China's ETS pilots: Allowance allocation, price mechanism and state-owned key enterprises. Chinese Journal of Population Resources and Environment. Vol 11(1), 26-32.

Wu, J., Deng, Y., Liu, H. (2013). House price index construction in the nascent housing market: The case of China. The Journal of Real Estate Finance and Economics. Vol 48(3), 522-545.

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