When total output at a firm begins to decrease despite the addition of inputs, what concept is being demonstrated?

The situation described pertains to the concept of diminishing marginal returns. This principle occurs when a firm increases its input usage—such as labor or capital—beyond a certain point, and the additional output produced from each additional input begins to decrease. Initially, increasing inputs can lead to significant increases in output due to better division of labor or more efficient utilization of resources. However, as more inputs are added, the efficiency gains diminish, and at some point, each extra unit of input contributes less and less to total output.

This concept helps explain why it’s possible for total output to actually decline even as more resources are being utilized; the contributions of the additional inputs are not enough to offset the inefficiencies created by overcrowding or overutilization of existing capacity. In contrast, economies of scale refer to advantages gained from production scaling up, operating below capacity discusses situations where a firm is not utilizing its resources fully, and short-run shutdown decisions relate to choices firms make when they cannot cover variable costs, which is a different issue altogether.