In this video we will learn about the short-run production function, specifically total product,
average product and marginal product.
By the end of this video you should be able to calculate total product, average product
and marginal product.
Also, you’ll be able to plot and have a better understanding of the total product,
average product and marginal product curves.
The first thing we do when calculating product is consider our variable input, which is labour
in this case.
Remember we consider capital fixed in the short run so the only variable changing is
labour.
For each additional unit of labour we’ll see a change in total output.
For the first worker, they bring total output to 1 unit.
The second increases the total to 4.
The third brings us to 9 and this continues all the way to the 9th worker who along with
the other produces a total of 37 units.
Next we take a look at the average product at each quantity of labour.
Our first workers total product is 1 and dividing that by 1, gives us an average product of
1.
We do the same thing to the others as labour increases.
Two workers produce 4 units, which results in an average product of 2.
We divide 4 units by the 2 workers and each worker produces an average of 2 units.
Continuing this down to the 9th worker we see that 9 workers contribute an average of
4.11 units.
This is interesting because up until our 6th worker, our average output is about 5 units
per worker.
It’s now decreasing and we’ll have to explore why.
Next let’s look at marginal product and see what each additional unit of labour adds
to the total.
Marginal product, or the additional product produced by the next worker is measured by
the change in total production divided by the change in the quantity of labour.
The quantity of labour is constantly 1 in this example so we only need to look for the
change in the quantity of production as each worker is added.
As we increase labour from 0 to 1, we increase our total production from 0 units to 1 unit.
Therefore marginal product is 1.
Bringing in the second worker increase total production to 4 units from 1 unit, which means
their marginal product is 3 units.
The third worker adds an additional 5 units, the fourth an additional 7 and the fifth an
additional 9 units.
However, something interesting starts to happen after the fifth worker.
The additional 6th worker actually contributes just 5 units.
The seventh worker’s contribution is just 4 units.
The eight contributes an additional 4 units and the ninth worker actually reduces overall
production!
To understand why we have to recall our pizza shop example.
After hiring so many employees, eventually the work space is crowded and inefficiencies
arise potentially as workers get in each other’s way.
Let’s bring all that information together on one table here.
I’m going to use this data to plot the curves for total product, average product and marginal
product.
The final graph looks something like this but I’ll walk you through each curve step
by step.
Using the information from the table we can see that the total product line increases
up until the 9th worker in which case it starts to fall.
The average product rises up until the 5th worker at which point it is constant including
the sixth worker but starts to decline as diminishing returns set in.
The marginal product curve rises as each additional worker adds more than the previous one, but
the hiring of the sixth worker starts to bring down marginal product.
It looks like productivity is impacted so severely that by the 9th worker, marginal
product is negative.
I want to draw your attention to two specific points related to the marginal product curve.
First is the addition of the 5th worker, who is able to increase total production and thus
marginal production significantly.
However, beyond this point the employment of additional labour causes additional returns
to decrease.
Marginal returns are still positive up until we employ the 9th worker, who is now having
an adverse impact on production, causing it to decrease.
Thus we can see that this diagram can be broken into three distinct phases: increasing marginal
returns, decreasing marginal return and negative marginal returns.
You should have a firm understanding why marginal returns behave in such a manner in order to
fully grasp the behaviour of cost curves - which we will cover next.
Hopefully you’re more comfortable calculating total product, average product and marginal
product by now.
It’s quite easy to find worksheets to practice the calculation and I’d also encourage you
to try and graph the information you process.
This will help you really get to grips with the behaviour of the curves and understanding
why ‘diminishing marginal returns of labour’ occurs in the short run.
If you have any questions or comments please leave them below or email me at enhancetuition@gmail.com.
I hope you found this explanation helpful and while it’s difficult at first, it will
get easier as you revise and practice.
That’s us done for now and I will see you in the next one!