To keep things simple, we will assume that labour is our only variable input. So, what is the contribution that each additional worker makes to total product? In other words, what is the marginal product of labour to total production?
Well, column 1 in our table shows the number of workers by employing the first worker. worker they can now produce 500 ornaments so total product is 500 the contribution the first worker makes to total product is therefore 500 this is called the marginal product which will list in column 3 By adding a second worker, total production increases to 1,500 ornaments. The marginal contribution of the second worker, his addition to total product, is therefore 1,000 units. Now, why is the second worker the only one?
worker adding so much more product than the first worker who only produced 500 units what we're seeing here is the benefit of specialization before the second worker was employed worker number one had to do everything from fetching the rods, bending them, welding them, painting them, and everything else in between. But now, two workers, the tasks are divided between them. Specialization takes place, we have better efficiency, and the productivity of each worker improves. Now, if we add a third worker, average productivity might increase even more.
Let's say output increases to 3,000 ornaments. The marginal contribution of the third worker is therefore 1,000. thousand five hundred units up to this point we're seeing increasing returns with each new worker adding a fourth worker pushes total production up to four thousand units the marginal product of worker number four is one thousand additional units do you see what's happening the marginal product of the fourth worker is less than the marginal product of the third worker diminishing returns are setting in using more workers in a limited space like this we will become inefficient, falling over each other, and it's dangerous. And, as the law says, if we keep adding more of a variable input to the fixed inputs, a point will be reached where each additional unit of the variable input will eventually produce less and less additional output.
In our example, this happened when we added the fourth worker. His marginal product of 1,000 units was less than that of worker 3, who added 1,500 units to the company's total production. Why is that? Additional labour only gets more productive when there's enough space, equipment and...
raw materials to work with. But in the short run the Blarka marker cannot change the amount of space and equipment it has. These inputs are fixed. All it can change is the number of workers. Adding a fifth worker still increases output up to 4,500 units, but the marginal product of the fifth worker is now only 500 units, and adding a sixth only increases total product to 4,700 units.
250 units. So the marginal product of the sixth worker is a fairly pathetic 250 units. While the factory is still producing a little bit more, this increase in output is happening at an ever diminishing rate. rate.
If they keep on adding workers, they'll eventually reach a point where the additional worker contributes nothing to production. In our example, this happens when worker number 7 is employed. If Blarke Marker persists in employing more and more workers, when they add number 8, they'll see total production actually start to decline.
In this case, total output drops to 4,500 units. The marginal contribution of the eighth worker is therefore a negative 250. And we can illustrate this with the help of a graph or diagram. On the horizontal axis, the number of workers is measured, and on the vertical axis, total output, or total product.
As more workers are employed, output increases, but only up to a point, after which it starts to decrease. Drawing a smooth curve through these points illustrates this. Adding more of a variable input, labour in our case, to a fixed input, increases total output more and more up to a certain point. and then increases output less and less till it reaches a peak, after which output will start to fall.
Let's see what the marginal product curve is telling us. Using the figures from this table, we can compile the following graph. Marginal product first increases. It reaches an optimal point and then starts to decrease and finally becomes negative. This is very clearly demonstrated by the marginal product curve.
With this information, we can now also calculate the average product per worker, and this will give us the average product per worker. some measure of productivity. The average product per worker is simply calculated by dividing the total product by the number of workers employed. In the case of one worker, the average product is 500 divided by 1, well that's 500. The average product when there's two workers is 1,500 divided by 2, which gives us 750, and so on.
These figures are given in column 3. Looking at average product in graphic form, we see that average product first increases, reaches a maximum, and then decreases. And if we compare total product with marginal product, we can see three definite phases of production. Phase 1 is up until point B.
Total product grows at an increasing rate and the marginal product of each additional worker also keeps rising. Phase 2 lies between point B and point A. Total product is still growing, but at a slowing rate.
The marginal product of labour is getting less and less with each additional worker, but the total output is still growing a little. Phase 3 is everything after point A. Total product is now falling, and the marginal product of labour is now actually negative.
Looking at these three phases, where would the company ideally like to be? In phase 1, 2... or three well definitely not in phase three in this phase production declines and the additional workers have a negative contribution that leaves us with phase one or two.
The general principle for most businesses is that as long as total production is growing, even if it's only slightly, it's fine to keep adding labor. In the short run anyway, that's all the firm can do if it wants to increase output. It's only when extra labour doesn't add any more output that it becomes a real problem.
Exactly where in phase two the best position for the firm is will depend on the price of the product and the cost of production.