In the context of long-run production, how does the principle of diminishing marginal returns affect economic efficiency and production scale when a firm increases its input levels?

The principle of diminishing marginal returns explains that when a firm increases the amount of one input, like labor, while keeping other inputs fixed, the additional output produced by each new worker eventually decreases. For example, if a factory hires more workers to make toys but doesn't increase the size of the factory, each new worker may contribute less to total toy production than the previous one. This decrease in productivity can lead to inefficiencies, as the firm may end up spending more on labor without getting enough extra output to justify the costs. As a result, the firm may find that expanding production further becomes less effective and could even hurt its profit margins. Therefore, understanding this principle helps firms decide the best scale of production to maintain economic efficiency.