Before my written explanation below, let’s continue this video series to see how they put it:
OK, so marginal product is a short-run concept. Why?
Because it tells us how much an additional input will produce assuming all other inputs are fixed. If we apply this concept to labor, we can define the marginal product of labor (MPL) as the additional (marginal) output produced resulting from adding one more worker, holding the capital stock constant. Or, in English, how much extra stuff is produced by adding one more worker.
Imagine a pizza factory of any size you want… maybe it is your kitchen… maybe it is a warehouse full of huge ovens… but once you settle on a size keep it fixed. Now, starting from zero, start adding workers…. and ask yourself how much extra output each worker can provide.
The assumed answers are:
With no workers you get no output
The first worker will be very productive… but he will be doing everything… maybe he can produce 10 pizzas per hour. The marginal product of the first worker is 10 pizzas.
For a while, adding workers beyond the first worker allows workers to specialize… and everyone becomes more productive. That is the second worker might make an additional 12 pizzas per hour – a MPL of 12 pizzas. This is the range of increasing marginal productivity.
At some point the benefits of specialization will be fully exploited (given your factory size)… imagine a factory where there is a worker at every machine… if you keep on adding workers, what can they do? We would say the firm has reached the point of diminishing marginal productivity. This means that, from now on, additional workers may increase output … but it will increase by smaller and smaller increments. Perhaps we have increasing MPL over the first 4 workers… let’s say the MPL of the 4th worker is 16 pizzas.
Did you count them? I know… there are only 14. You think your instructor totally blew it. Well… I did but I am going to recover by saying that the above set of pizzas is for the 5th worker! And when we add a 5th worker into the mix, output goes up by 14 pizzas. This is a diminishing MPL because 14 is less than 16. (Note that total output still goes up… it is just going up at a slower rate now.
In the extreme, adding another worker may result in NO additional output (a MPL = 0)… or, even more extreme, a negative MP (Clearly no firm would keep hiring workers once the MPL hits 0, right?)
Understand the relationships between total product (TP), marginal product (MP), and average product (AP). Close the book, draw and explain the curves to yourself. Watch another video.
Below is a generic total product curve… illustrating how much output a firm gets in the short-run as they add a variable input (labor) into a fixed input (capital). It has quantity of Labor employed on the x-axis and amount of output on the y-axis. There are no $ in this graph – just the relationship between inputs and output. Initially we see an increasing MPL as explained above … the total product curve has a positive and increasing slope. Eventually we hit a point of diminishing returns and the MPL begins to fall. This is an inflection point – meaning the curve still has a positive slope … but the slope is now decreasing. That is, output continues to rise until the MPL falls to zero. This graph is in most textbooks. You are responsible for understanding it.
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