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THE LAW OF DIMINISHING MARGINAL RETURNS The law of diminishing marginal returns states that as you increase the quantity of a variable factor together with a fixed factor, the returns (in terms of output) become less and less. Thus if we are using labor in the production of wheat given a fixed amount of land, after a certain point the increase in the output of wheat will become less and less until it starts reducing the total output of wheat.

THE LOCATION, SIZE OF DECISION The location decision depends upon both the location of raw material suppliers and the location of the market. The nature of the product, transportation costs, availability of suitable land for production, stable power supply and good communications network, availability of qualified and skilled workers, level of wages, the cost of local services and availability of banking and financial facilities are among some other important factors. The size of an industry can lead to external economies and diseconomies of scale.  Economies of scale: The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.   There are two types of economies of scale: External economies - the cost per unit depends on the size of the industry, not the firm. Internal economies - the cost per unit depends on size of the individual firm. 

Diseconomies of scale Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs. They are less well known than what economists have long understood as "economies of scale", the forces which enable larger firms to produce goods and services at reduced per-unit costs.