Page 450 - Economics

CONFIRMING PAGES

PART SIX
382
Microeconomics of Product Markets
The law of diminishing returns also holds true in non- Note that the law of diminishing returns assumes that
agricultural industries. Assume a wood shop is manufac- all units of labor are of equal quality. Each successive
turing furniture frames. It has a specific amount of worker is presumed to have the same innate ability, motor
equipment such as lathes, planes, saws, and sanders. If this coordination, education, training, and work experience.
shop hired just one or two workers, total output and pro- Marginal product ultimately diminishes, not because
ductivity (output per worker) would be very low. The successive workers are less skilled or less energetic but be-
workers would have to perform many different jobs, and cause more workers are being used relative to the amount
the advantages of specialization would not be realized. of plant and equipment available.
Time would be lost in switching from one job to another,
and machines would stand idle much of the time. In short, Tabular Example Table 20.1 is a numerical illustra-
the plant would be understaffed, and production would be tion of the law of diminishing returns. Column 2 shows
inefficient because there would be too much capital rela- the total product, or total output, resulting from combin-
tive to the amount of labor. ing each level of a variable input (labor) in column 1 with
The shop could eliminate those difficulties by hiring a fixed amount of capital.
more workers. Then the equipment would be more fully Column 3 shows the marginal product (MP), the
used, and workers could specialize on doing a single job. change in total product associated with each additional
Time would no longer be lost switching from job to job. unit of labor. Note that with no labor input, total product
As more workers were added, production would become is zero; a plant with no workers will produce no output.
more efficient and the marginal product of each succeed- The first 3 units of labor reflect increasing marginal re-
ing worker would rise. turns, with marginal products of 10, 15, and 20 units, re-
But the rise could not go on indefinitely. If still more spectively. But beginning with the fourth unit of labor,
workers were added, beyond a certain point, overcrowd- marginal product diminishes continuously,
ing would set in. Since workers would then have to wait in becoming zero with the seventh unit of la-
line to use the machinery, they would be underused. Total bor and negative with the eighth.
output would increase at a diminishing rate, because, given Average product, or output per labor
the fixed size of the plant, each worker would have less unit, is shown in column 4. It is calculated
capital equipment to work with as more and more labor W 20.2 by dividing total product (column 2) by the
was hired. The marginal product of additional workers Total, marginal, number of labor units needed to produce it
would decline, because there would be more labor in pro- and average (column 1). At 5 units of labor, for example,
portion to the fixed amount of capital. Eventually, adding product AP is 14 ( 70 5).
still more workers would cause so much congestion that
marginal product would become negative and total prod- Graphical Portrayal Figure 20.2 (Key Graph)
uct would decline. At the extreme, the addition of more shows the diminishing-returns data in Table 20.1 graphically
and more labor would exhaust all the standing room, and and further clarifies the relationships between total,
total product would fall to zero. marginal, and average products. (Marginal product in

TABLE 20.1 Total, Marginal, and Average Product: The Law of Diminishing Returns
(3) (4)
(1) Marginal Product (MP), Average
Units of the Variable (2) Change in (2) Product (AP),
Resource (Labor) Total Product (TP) Change in (1) (2) (1)
0 0 —
10 Increasing
1 10 marginal 10.00
15
2 25 returns 12.50
20
3 45 15.00
15 Diminishing
4 60 marginal 15.00
10
5 70 returns 14.00
5
6 75 12.50
0 Negative
7 75 marginal 10.71
5
8 70 returns 8.75

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