You can spend all kinds of money to improve all of those facets but that time spent polishing graphics does not equal GTA sales.  The only way to say that time spent on such trivial things isn't diminishing returns would be if you can correlate more game sales or higher profitability to them and you simply can't do that. 

I can tell you for sure time spent on the graphics will lower your profitability. Those are extra bodies or extra time spent by people whom cost about 30-60k per year simply add to the cost of the game. 

We aren't saying that no one will notice the improved graphics.  I'm sure graphics enthusiasts everywhere will appreciate it.  Return usually isn't measured in appreciation from graphics enthusiasts. It's normally defined in dollars and profit.  Amazing graphics cost a lot of money to produce but no one can show that it substantially increases sales.  

Sure, but I'm not talking about economical results, I'm talking about visual ones - which is what the above image is about. We're also not necessarily talking about time spent on graphics, but time (work time and processor time) spent on physics and lighting. That's not something that applies to just one game, but to multiple productions - or is even sellable as middleware.

As I mentioned elsewhere, animation is a different issue, but you're sure to see more physics-influenced systems there as well.

Which as I said above is fine and dandy for graphics enthusiasts. They will notice. Even visually MOST customers wont notice or care cause most aren't graphics enthusiasts.  I wonder if HD television penetration of higher end sets is even high enough that the majority of people can even see difference so we are still looking at diminishing returns even visually if most customers dont own a display that is large enough and HD enough to see such differences.  

With Companies like Epic things are slightly different as they do sell an engine or middleware if you will.  In those cases it makes sense as I can see how developers would gush over and love to work with something so advanced as the developer mindset tends to be one of cutting edge or bust.  I just think that doesn't apply to most game developers.  

Well, look back at gens 3-4-5. Sure it changed, but not all that much. The last gen was a HUGE change. Consoles made huge graphic leaps last gen. Now it's slowed down again.

Also look at the start of last gen, verses how things look now. Crackdown and Oblivion are nice, but check out Halo 4 or Skyrim. Nice gains there too. Hopefully this gen will really look even better in a year or two.

Honestly? I think you're wrong. Milestone steps in animation and physics will be noticed even by the most casual of consumer - they notice in film, so why not in games?

People comparing PS4 with 360 launch titles WASTE everyones time because you cannot compare those 2 gens. Why?

2005 was BEFORE we were able to simulate 90% of real world effects in gaming. Just look at games like SaintsRow 3 Battlefield 3 etc and how their e.g "wet streets" look great compared to shit like SaintsRow 2 (that also was on 360) etc. Somewhere around 2010/2011 everything suddenly looked way better than before.

For me the 2005 to 2011 change is more obvious than the last gen to current gen difference.

The 2005 launch games mostly looked better because of the huge power gap (better textures more polygons etc) not thanks to better effects (people didnt came up with most of them yet).
The PS4 and Xone launch titles on the other hand mostly look better than 360 launchtitles because of the effects that showed up around 2011 not so much because of better polycount or textures. Sure PS360 gen has some ugly textures tho but every dev that knows what he is doing will not use PS2 textues!

Feel free to think what you will. 

What makes you think they notice in film?  If the casual consumer did care or notice it certainly didn't bring them into theaters last year to watch such films(The top grossing and best weekend films in 2013 were all CG fests).  Ticket sales were still down further than it's been since 95 and revenue lower than it's been since 05. This is despite increase in costs of overall tickets due to the more wide spread availability of 3D.  So keep thinking casual consumers care when it comes to film or video games that's your perogative. 

Even on a place like gamefaqs where you can assume that all users are at least casual interest in games they don't really notice the difference either  http://gamrconnect.vgchartz.com/thread.php?id=179066

I agree with you, launch Gen 7 in 2005 didn't look as good as Gen 7 games in 2010/2011.

That's precisely WHY we're comparing launch-to-launch.  Your analysis tells that launch games are not as good as it will get.

Isn't that the point though? That games released on 8th gen now are using 7th gen technology, and that no one can predict what will come into play in the next 5 years or so.

They went out in droves to watch Avatar though, based solely on the supposition that they were going to see the latest and greatest in technology.

Cinema now competing with numerous other entertainement forms, including games, does not indicate anything about audiences ability to percieve large differences.

As for the last bit, I'm not talking about 720p/1080p differences, but major advancements in physics and animation. Currently games look like someone playing with slightly advanced action figures in a world where nothing has any weight and all objects exist in seemingly separate realities.