Marginal product of labor - Wikipedia
The total product concept is used to investigate the relation between output and The third point, C, indicates where the slope of the total product curve is zero. a) Graph the production function for Nimbus Inc. Indicate when the firm b) On a separate graph, graph the Average Total Cost curve and the Marginal Cost. Relationship between marginal and average product curves. When MP lies . the average up. This means MC intersects AVC at the turning point of AVC. .. - Satisficing -Ethical and environmental concerns: corporate social responsibility.
The total product concept is used to investigate the relation between output and variation in only one input in a production function. For example, suppose that Table represents a production system in which Y is a capital resource and X represents labor input. It is also shown in column 2 of Table and is illustrated graphically in Figure. One would, of course, obtain other total product functions for X if the factor Y were fixed at levels other than two units.
Figures illustrate the more general concept of the total product of an input as the schedule of output obtained as that input increases, holding constant the amounts of other inputs employed. This figure depicts a continuous production function in which inputs can be varied in a marginal unbroken fashion rather than discretely.
Suppose the firm wishes to fix the amount of input Y at the level Y1. Total, Marginal, and Average Product Curves: The marginal product of a factor, MPX, is the change in output associated with a oneunit change in the factor input, holding all other inputs constant. And so we've already seen total and marginal, now I'm just adding an average column here.
And all I've done is I've taken total and divided by the quantity, or the number of employees. So this tells us that, for example, let's say we have three employees, that on average each employee is producing If we were to graph it-- again, your average is this curve right here-- it goes up at first and then falls, just as marginal went up and then fell like that. Let's talk about actually these two curves and how they're related to one another.
So here, where the marginal lies above the average, that would be from here to the left. The marginal is up above the average. Notice how it's pulling the average up. If I were to use a sports analogy-- I think that actually helps before I go into this specific example-- If I were to use a sports analogy, let's say that a quarterback has a certain average.
Let's say we're talking about his average touchdown passes per game. And let's say that his average right now is, on average, he's passing two. So he has two average touchdown passes per game. That would be, obviously, this curve-- his average.
The marginal represents his next game, his next performance. Because marginal means your additional thing. So if, in the next game, he has a really great game and he has, let's say, five touchdown passes, won't that bring his average of two up? That's what's going on here. So with marginal and average product of labor, when we're here, to the left of this spot, adding another worker, one more, will add more than the average to output. So we'll pull that average up. As soon as that quarterback now has a really bad game, his marginal performance let's say is 0 touchdown passes, that's going to pull his average down.
And that's where the marginal lies below the average. So where a marginal lies below the average, it's going to pull it down.
And that would mean that adding another worker will add less than the average to output. It doesn't mean necessarily that they're going to bring overall output down, it just means that they're going to add less than the average to output.
And that brings us to a concept called diminishing marginal product, which says that the marginal product of capital or labor will begin to fall at some point, holding everything else constant. So right here-- I said I would be talking to you about why the curves were shaped the way that they are. Notice how total product is increasing except when we hire the sixth employee.
Product: Total, Marginal and Average Tutorial | Sophia Learning
But it's increasing at different rates, and that's what marginal product measures. It measures the rate at which total product is changing. And at first-- look at how the second employee, what he adds to the firm. He adds actually more than even the first worker. Why would that be? Well if you think about it, specialization can kind of explain that.
With two people, can't you get so much more done than with just one person? But remember, in the short run, there's a fixed input. And so there's fixed amount of stuff for these workers to work with. The long-run average cost LRAC curve Graph showing the firms lowest cost per unit at each level of output, assuming that all factors of production are variable.
The LRAC curve assumes that the firm has chosen the optimal factor mix, as described in the previous section, for producing any level of output. The costs it shows are therefore the lowest costs possible for each level of output.
This critical point is explained in the next paragraph and expanded upon even further in the next section.
Suppose Lifetime Disc Co. In the short run, Lifetime Disc might be limited to operating with a given amount of capital; it would face one of the short-run average total cost curves shown in Figure 8.
If it has 30 units of capital, for example, its average total cost curve is ATC In the long run the firm can examine the average total cost curves associated with varying levels of capital. Four possible short-run average total cost curves for Lifetime Disc are shown in Figure 8. The LRAC curve is derived from this set of short-run curves by finding the lowest average total cost associated with each level of output.
With the exception of ATC40, in this example, the lowest cost per unit for a particular level of output in the long run is not the minimum point of the relevant short-run curve.
Marginal product of labor
Here, average total cost curves for quantities of capital of 20, 30, 40, and 50 units are shown for the Lifetime Disc Co. At a production level of 10, CDs per week, Lifetime minimizes its cost per CD by producing with 20 units of capital point A. At 20, CDs per week, an expansion to a plant size associated with 30 units of capital minimizes cost per unit point B. The lowest cost per unit is achieved with production of 30, CDs per week using 40 units of capital point C. If Lifetime chooses to produce 40, CDs per week, it will do so most cheaply with 50 units of capital point D.
Economies and Diseconomies of Scale Notice that the long-run average cost curve in Figure 8. The shape of this curve tells us what is happening to average cost as the firm changes its scale of operations. A firm is said to experience economies of scale Situation in which the long-run average cost declines as the firm expands its output. A firm is said to experience diseconomies of scale Situation in which the long-run average cost increases as the firm expands its output.
Constant returns to scale Situation in which the long-run average cost stays the same over an output range. Why would a firm experience economies of scale? One source of economies of scale is gains from specialization. Another source of economies of scale lies in the economies that can be gained from mass production methods. Why would a firm experience diseconomies of scale? At first glance, it might seem that the answer lies in the law of diminishing marginal returns, but this is not the case.
The law of diminishing marginal returns, after all, tells us how output changes as a single factor is increased, with all other factors of production held constant. In contrast, diseconomies of scale describe a situation of rising average cost even when the firm is free to vary any or all of its factors as it wishes. Diseconomies of scale are generally thought to be caused by management problems. Eventually, the diseconomies of management overwhelm any gains the firm might be achieving by operating with a larger scale of plant, and long-run average costs begin rising.
Production and Cost
Firms experience constant returns to scale at output levels where there are neither economies nor diseconomies of scale.
For the range of output over which the firm experiences constant returns to scale, the long-run average cost curve is horizontal. There may be a horizontal range associated with constant returns to scale. The upward-sloping range of the curve implies diseconomies of scale. Firms are likely to experience all three situations, as shown in Figure 8. At very low levels of output, the firm is likely to experience economies of scale as it expands the scale of its operations.
There may follow a range of output over which the firm experiences constant returns to scale—empirical studies suggest that the range over which firms experience constant returns to scale is often very large. And certainly there must be some range of output over which diseconomies of scale occur; this phenomenon is one factor that limits the size of firms. A firm operating on the upward-sloping part of its LRAC curve is likely to be undercut in the market by smaller firms operating with lower costs per unit of output.
The Size Distribution of Firms Economies and diseconomies of scale have a powerful effect on the sizes of firms that will operate in any market. Suppose firms in a particular industry experience diseconomies of scale at relatively low levels of output.
That industry will be characterized by a large number of fairly small firms. The restaurant market appears to be such an industry. Barbers and beauticians are another example. If firms in an industry experience economies of scale over a very wide range of output, firms that expand to take advantage of lower cost will force out smaller firms that have higher costs.