In a production process, as a production factor increases, the amount of total output increases, but it will reach an optimal output level before it begins to decrease or diminish. Production factors include inputs such as labor, machine hours, and raw material.

Assuming a constant level of other production factors, every additional unit of a production factor leads to a greater increase in total output (marginal output) initially. After reaching a certain optimal production level, every additional unit of the production factor will result in a smaller increase in total output with a diminishing marginal output, as the efficiency is limited by the other production factors.

The Point of Diminishing Returns refers to a point after the optimal level of capacity is reached, where every added unit of production results in a smaller increase in output. According to the law of diminishing marginal returns, increasing a factor of production doesn't always lead to increased marginal productivity. The point of diminishing returns can be identified by taking the second derivative of the production function.