How does the principle of diminishing returns affect resource allocation in a competitive market, particularly in the context of supply and demand interaction?

The principle of diminishing returns means that as you keep adding more of one resource, like labor or capital, to a fixed amount of another resource, like land, the additional output you get from each extra unit will eventually start to decrease. In a competitive market, this principle influences how businesses allocate their resources because they want to maximize their profits. For example, if a farmer keeps hiring more workers to harvest crops on a fixed piece of land, each new worker might contribute less to the total harvest than the one before. This means that if the costs of hiring more workers outweigh the benefits of the extra crops produced, the farmer might decide not to hire additional workers. Therefore, understanding diminishing returns helps businesses make better decisions about how much of each resource to use in order to balance supply and demand effectively.