Law of Diminishing Marginal Products - Economics Video Lecture | Economics Class 11 - Commerce

in today's lesson we're going to examine
the effect of adding additional units of
labor to the production of a particular
good in the short run
today's topic is part of the
microeconomics unit on the theory of the
firm and which we examine the behaviors
of firms in particular markets in terms
of how many workers they wish to hire
how much output they wish to produce and
what kinds of prices they wish to charge
for their products before we get into
details about the cost and price
decisions of firms we're going to talk
about a concept called the law of
diminishing marginal returns now let's
look at our example here we're going to
be looking at the short-run production
in a toy truck Factory we have labor
which is represented by our workers on
the Left we have capital which is
represented by the tools in the next
column over and what we're going to
measure is the change in the output of
toy trucks that results from the
addition of units of Labor to the
production of toy trucks in this factory
so we'll also record the total product
or the total output of toy trucks and
the marginal product which is the change
in total product for each additional
unit of Labor added so first let's make
an assumption here we're going to assume
that the quantity of capital is fixed in
the short-run
in other words our factory cannot vary
the number of tools or technology that
it employs towards the production of
trucks we can think of it this way
there's one factory and we can add more
and more workers to that factory but we
cannot build additional factories or
acquire more equipment to put in our
factory so the only variable resource in
this exercise is going to be labor the
number of workers so let's start with
our factory in which there are three
sets of tools and only one worker
working in that factory if one worker
joins this factory and there are three
sets of tools we can assume that
one worker will be relatively
unproductive and in one day we'll be
able to manufacture one toy truck so our
total product with one worker and three
tools is one toy truck the marginal
product of the first unit of labour
therefore is one toy truck marginal
product measures the change in total
product attributable to each additional
worker now let's go over to our quantity
of labour column and see what happens
when we add additional workers let's
assume that the factory owner hires one
additional worker so now there are two
workers employed in the production of
toy trucks however since we are in the
short-run the amount of capital
available remains fixed at only three we
can assume that with a second worker
added to the production process the
productivity or the efficiency with
which the three sets of tools are used
will increase and the total product of
the three workers will exceed the total
product of one worker by two additional
trucks now due to the fact that the
second worker enabled this factory to
work more efficiently three trucks are
able to be produced giving us a total
product of three and a marginal product
of two trucks
of course the marginal product refers to
the change in total product attributable
to the additional worker therefore as
one more worker was added the total
product increased by two trucks giving
us a marginal product of two now the
factory owner decides to hire a third
worker so in the next round we're going
to have three workers employed but again
the amount of capital is fixed since
we're in the short-run here with three
workers the productivity increases even
further and now instead of three trucks
the three workers combined are able to
produce six trucks total the capital is
being used very efficiently now since
each worker has his own set of tools to
work at all capital can be used
efficiently giving us a marginal product
of three truck
so far the efficiency of each additional
worker has exceeded the efficiency of
the previous worker in the short run as
additional units of labour are added to
our Factory the existing capital is used
more and more efficiently now what
happens if we add a fourth worker to
this Factory and the next round let's
employ for workers towards the
production of trucks again however the
quantity of capital is fixed since we
are in the short run now the fourth
worker will not have the luxury of
having tools to work with the fourth
worker may be able to contribute to the
production process but not by the extent
to which the third 2nd or 1st worker
added to the production so what is
likely to happen is that with four
workers the total product will continue
to rise but it will start to rise at a
diminishing rate so let's say the total
product with the fourth worker goes from
six trucks to eight trucks one two three
four five six seven eight trucks total
product continues to rise however the
marginal product now begins to decline
the fourth worker only adds two
additional trucks to the production
process this is explained by the fact
that there are no additional tools for
the fourth worker to use the quantity of
capital is fixed and only labor is
changing now what if the factory owner
decided to hire a fifth worker in the
next round let's add one additional
worker for a total quantity of labour of
six and we'll keep the number of tools
available that only three pairs and the
total product will once again increase
but we will see it increase that even a
slower rate so let's say that only nine
trucks are made when the fifth worker is
hired the output attributable to the
fifth worker is only one truck now the
marginal product of labor has declined
the additional number of trucks
attributable to each additional worker
is now less due to the fact that there
are simply no more tools for additional
workers to use while total product
continues to increase the marginal
product begins to decrease
now what happens if a sixth worker is
hired clearly there are no more tools
for these workers to use the six worker
may be able to contribute to production
but it's more likely that the six worker
is only inhibiting or getting in the way
of the other workers on the factory
floor who all have tools to use this six
worker will have no tools to use and may
actually lead to a decrease in the total
product let's assume that with six
workers total product actually decreases
from nine to eight trucks this means
that the additional output attributable
to the six worker is actually negative
one truck the six worker decreases the
total output of trucks due to the fact
that at this point he's only getting in
the way there is no way that six workers
can lead to more production in the short
run given the fact that the quantity of
capital available is limited to only
three sets of tools so how would this
look if we were to take the information
in this table and plot it in a numerical
table and on a graph let's look at the
next page here what we've done is we've
added workers when we had one worker two
workers three workers four workers
five and six the marginal product of
labor changed each time we added
additional workers at first one worker
contributed only one truck to the
production process the output
attributable to the second worker was
two trucks since capital was able to be
used more efficiently with the third
worker we saw marginal products go from
two to three and total product increased
from three to six trucks capital is now
being used very efficiently with the
fourth worker however total output
increased to only eight trucks meaning
that the 4th worker added only two
additional trucks to the total output of
this firm upon hiring the fifth worker
total output went up to nine trucks
meaning the marginal product of the
fifth worker was one truck and upon
hiring six workers total output declined
back to eight trucks meaning the
marginal product was actually negative
six worker led to a decrease in the
total productivity of our truck Factory
if we plot these points on our marginal
product graph on the right here we'll
have a marginal product curve let's do
that now on our x-axis is the quantity
of labour from zero to six workers on
our vertical axis is the quantity of
output attributable to each additional
worker or the marginal product from zero
to six so at one worker the marginal
product was one at two workers the
marginal product was two the third
workers marginal product was three
however the fourth workers marginal
product began to decline and with five
workers it was down to one and with six
workers the marginal product was
actually negative one if we connect
these dots what we have is a marginal
product curve for labor in our toy truck
Factory in the short-run this is the
output attributable to additional
workers added to a fixed amount of
capital in our toy factory let's make
some observations about this curve now
one thing we notice is that when workers
are first hired there is a range over
which marginal product increases this we
refer to as the range of increasing
marginal returns between zero and three
workers each additional worker hired
actually led to an increase in the
productivity of labour meaning that
additional workers were more productive
than those hired before them now the
reason for increasing marginal returns
is in efficiency the three tools
available in this Factory
could not be used efficiently by only
one or two workers and in fact require
three workers to achieve the full
efficiency of capital use in our Factory
however beyond three workers we began to
see the marginal product of labor
decline this range of our marginal
product curve is explained by the
concept of diminishing marginal returns
diminishing marginal returns occurs
beyond three workers in our toy truck
Factory
the explanation for why diminishing
marginal returns occurs is decreasing
efficiency because the amount of capital
available in our factory is fixed
additional workers beyond three only
begin to get in the way of the more
productive workers hired before them of
course total output in our factory
continued to increase until we hired the
sixth worker however it increased at a
decreasing rate the fourth and fifth
workers contributed to the output of the
factory however they contributed at a
decreasing rate there was simply not
enough capital to go around and by the
time the sixth worker was hired he
actually reduced the productivity of all
the other workers in this Factory and
the factories total output fell from
nine tie trucks to only eight toy trucks
so in this video lesson we have shown
how when a variable resource in this
case labor is added to a fixed resource
in the short-run in this case capital at
first the productivity of the variable
resource will increase as we see here
marginal product increases until the
third worker but beyond three workers in
our factory the marginal product of
labor decreased due to the law of
diminishing marginal returns due to the
fact that capital is fixed and labor is
variable workers beyond a certain point
are no longer contributing to an
increase in the production of this good
if we were to add a seventh and eighth
or ninth worker to this factory the
factory would become so crowded and all
the workers would therefore become so
unproductive that the total product of
the factory would begin to decline
perhaps even fall to zero if the factory
became too crowded and there was
absolutely no way that anybody could
make efficient use of the existing
capital the principle of diminishing
returns says that beyond a certain
quantity of workers the output
attributable to each additional worker
will decrease due to the falling
efficiency with which existing capital
can be used in the short-run in order
for a firm to overcome diminished
returns more capital would have to be
added to the production process now that
would require a law
long run acquisition of more capital and
that will be covered in a later video
lesson