Changes

===The Short Run===

===The Short Run===

Think of a baking some bread.  It requires some time and effort to bake one loaf of bread.  But there is not as much extra effort to stick another loaf in the oven.

 

Think of a baking some bread.  It requires some time and effort to bake one loaf of bread, and the expense of heating the oven.  But there is not as much extra effort to stick a second loaf in the oven at the same time.

Or imagine going to a baseball game.  The cost for one person to go is the ticket price plus the cost of gas and parking and wear and tear on the car.  The cost for a second person to go with the first person is just the price of the ticket.  There is no extra gas or parking or wear and tear on the car for a second person to ride along.  So the marginal cost for the second person is much less than for the first person.

Or imagine going to a baseball game.  The cost for one person to go is the ticket price plus the cost of gas and parking and wear and tear on the car.  The cost for a second person to go with the first person is just the price of the ticket.  There is no extra gas or parking or wear and tear on the car for a second person to ride along.  So the marginal cost for the second person is much less than for the first person.

But let’s return to your role as President of the widget company.  You are deciding how many employees to hire.  You have an assembly line that needs workers.  Each additional employee that you hire to work on that assembly line increases the “marginal product of labor,” which is the increase in output for each additional unit of labor.  It is often called “MP”.   

But let’s return to your role as President of the widget company.  You are deciding how many employees to hire.  You have an assembly line that needs workers.  Each additional employee whom you hire to work on that assembly line increases the '''''“marginal product of labor,” which is the increase in output for each additional unit of labor.  It is often called “MP”'''''. 

 

Let’s explain MP in a different way to make sure you understand it.  The more workers you hire, the more goods your company can produce.  Suppose you can make 1000 widgets a week with 10 employees.  Then you hire one more employee, and your output increases to 1015 widgets.  What is the “marginal product of labor,” or MP, for your 11th employee?  It is 1015-1000=15.  Note that this is less than the '''''average''''' product of labor, which 1015/11 = 92.3 for 11 employees.   

Let’s explain MP a different way to make sure you understand it.  The more workers you hire, the more goods your company can produce.  Suppose you can make 1000 widgets a week with 10 employees.  Then you hire one more employee, and your output increases to 1015 widgets.  What is the “marginal product of labor,” or MP, for your 11th employee?  It is 1015-1000=15.  Note that is less than the average product of labor, which 1015/11 = 92.3 for 11 employees.  You are suffering from “diminishing marginal returns.”  You received much more benefit from the 1-10 employees you hired earlier (their average product of labor is 100) than this 11th employee (with its MP of only 15).

When the marginal product of labor (MP) is less than the average product of labor, then you are suffering from the problem of “diminishing marginal returns.”  You received much more benefit from the 1-10 employees you hired earlier (their average product of labor is 100) than this 11th employee (with its MP of only 15).

Again, this makes sense.  As you hire more and more employees, your benefit from will eventually decline.  Once the assembly line has enough workers to satisfy demand, for example, you would be wasting money by hiring additional workers.  They would end up spending the day talking to each other rather than doing productive work.  If you were to keep hiring employees, then eventually the MP for your next employee would fall to zero.  He would have nothing productive to do.

Again, this makes sense.  As you hire more and more employees, your benefit from the additional people will eventually decline.  Once the assembly line has enough workers to satisfy demand, for example, you would be wasting money by hiring additional workers.  They would end up spending the day talking to each other rather than doing productive work.  If you were to keep hiring employees, then eventually the MP for your next employee would fall to zero.  He would have nothing productive to do. There is a saying that describes this same problem:  "too many cooks spoil the broth!"

On the other side, however, the MP for your first employee would be greater than zero.  Additional employees might have even higher MPs because you are filling your assembly line.  If your assembly line needs 10 employees to run it, then the MP for your 10th employee will the highest of all.  After that, the MP begins falling.

On the other side, however, the MP for your first employee would be greater than zero.  Additional employees might have even higher MPs because you are filling your assembly line.  If your assembly line needs 10 employees to run it, then the MP for your 10th employee will the highest of all.  After that, the MP begins falling.

In general, MP rises as your initial employees are hired, eventually reaches a maximum at some point and then falls back towards zero for each additional employee.  It is an upside-down oval, beginning at MP=0 for 0 employees and returning to MP=0 for a large number “n” of employees.  The value of “n” depends on the business.   

In general, MP rises as your initial employees are hired, eventually reaches a maximum at some point and then falls back towards zero for each additional employee.  It is an upside-down oval, beginning at MP=0 for 0 employees and returning to MP=0 for a large number “n” of employees.  The value of “n” depends on the business.   

The optimal number of employees for an NBA basketball team, when MP is its maximum, is only about a dozen players.  The optimal number of employees for Wal-Mart, when MP is its maximum, is over 1 million employees.  So it all depends on what the company is producing.

The optimal number of employees for an NBA basketball team, when MP is its maximum, is about only a dozen players.  The optimal number of employees for Wal-Mart, when MP is its maximum, is over 1 million employees.  So determing the optimal number of employees depends on what the company is producing.

Can we can find the marginal cost (MC) of making that extra widget based on (i) the wages we have to pay the extra employee and (ii) his marginal productivity (MP)?  If it costs us $100 to hire one more employee, and he enables us to make 10 more widgets, then our marginal cost (MC) is simply $100/10 = $10 per unit.  In other words, MC = wage/MP.

Can we can find the marginal cost (MC) of making that extra widget based on (i) the wages we have to pay the extra employee and (ii) his marginal productivity (MP)?  If it costs us $100 to hire one more employee, and he enables us to make 10 more widgets, then our marginal cost (MC) is simply $100/10 = $10 per unit.  In other words, '''''MC = wage/MP'''''.

Let’s make sure we understand this by looking at another example.  Suppose that hiring one more sales agent at $80 per day in our clothing store enables us to sell 8 more dresses.  What is our marginal cost for dresses at that point?  It is simply the additional cost of $80 (the wage) divided by that employee’s marginal productivity of 8 new sales, yielding a marginal cost of $10 per dress.

Let’s make sure we understand this by looking at another example.  Suppose that hiring one more sales agent at $80 per day in our clothing store enables us to sell 8 more dresses.  What is our marginal cost for dresses at that point?  It is simply the additional cost of $80 (the wage) divided by that employee’s marginal productivity of 8 new sales, yielding a marginal cost of $10 per dress.