Lecture Notes: Marginal Product of Labour and Production Efficiency

Overview

• Focus on labour as the only variable input.
• Examined the contribution of each additional worker to total production.
• Discussed concepts of marginal product, specialization, and diminishing returns.

Key Concepts

Marginal Product of Labour

• Definition: Contribution of each additional worker to total product.
• Example:
  • 1st worker: Total product = 500 ornaments (Marginal product = 500 units)
  • 2nd worker: Total product = 1500 ornaments (Marginal product = 1000 units)

Specialization

• Increasing returns due to specialization when tasks are divided between workers.
• Example:
  • 3rd worker increases output to 3000 ornaments (Marginal product = 1500 units)

Diminishing Returns

• Occurs when adding more workers results in less efficient production.
• Example:
  • 4th worker: Total production = 4000 ornaments (Marginal product = 1000 units)
  • 5th worker: Total production = 4500 ornaments (Marginal product = 500 units)
  • 6th worker: Total production = 4700 ornaments (Marginal product = 250 units)
  • 7th worker: No addition to production.
  • 8th worker: Decreases production (Marginal product = -250 units)

Graphical Representation

• Axes: Number of workers (horizontal) vs Total output (vertical).
• Curve: Total output increases, peaks, then decreases as workers are added.
• Marginal Product Curve: Increases, peaks, then decreases becoming negative.

Average Product per Worker

• Calculation: Total product divided by number of workers.
• Examples:
  • 1 worker: 500/1 = 500
  • 2 workers: 1500/2 = 750

Three Phases of Production

• Phase 1: Total product grows at an increasing rate. Marginal product rises.
• Phase 2: Total product grows at a decreasing rate. Marginal product declines but is still positive.
• Phase 3: Total product declines. Marginal product is negative.

Optimal Production Phase

• Goal: Avoid Phase 3 where production declines.
• Ideally operate within Phase 1 or 2.
• Decision depends on product price and production costs.

Conclusion

• In the short run, businesses can keep adding labor as long as total production grows, even slightly.
• Important to identify the best phase for operation to ensure efficiency and profitability.