Diminishing returns can be defined as the fall in the marginal physical product of an input as the total amount of the input rises, keeping the other variables constant. Diminishing return sets in after a possible initial increase in marginal returns. In economics, it is also referred to as the ‘law of diminishing returns’ or ‘diminishing marginal returns’. Technically, the firm’s short run marginal cost curve will eventually increase.
You can understand the concept better by the following example: Say you have a store with 5 employees. You pay these employees a salary, plus commission. Business is booming and you hire more employees hoping to make more sales but remember that includes more salaries per employee and more commissions per sale. You keep adding more employees and so forth. At some point, the number of employees you add will result in diminishing returns because your costs will exceed your expected profits. In other words your marginal return will begin to decrease.