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One Variable Input

firm decisions - based of benefits on incremental or average basis  

  • total output - can actually decrease after too many workers are employed
    • too many workers >> workers get in each others' way, entrepeneurship decreases
  • average product of labor (APL) = Q/L
    • output per unit of labor
    • slope of line from origin to point on total product curve
  • marginal product of labor (MPL) = DQ/DL
    • derivative of the production function w/ respect to labor
    • additional output produced w/ increase in labor by 1 unit
  • marginal output less than 0 >> decreasing total output
  • marginal output less than average output >> decreasing average output
    • marginal output intersects average output at max average output

 

  • graph not drawn to scale
  • total output curve
  • average product of labor curve
  • marginal product of labor curve
  • when marginal product curve crosses the x-axis (becomes negative), total output curve reaches a maximum
  • at intersection of marginal product and average product, average product is at a maximum

law of diminishing marginal returns - additions from input to output gradually decrease  

  • increasing input has more effect on output early on than later
  • small labor force >> adding labor affects output considerably
    • more workers assigned to specialized tasks, etc
  • larger labor force after adding labor >> adding additional labor doesn't affect output as much as before
    • too many workers >> less efficient, more willing to slack
  • technology improvements >> shifts total output curve >> increases labor productivity as a whole
    • note however, that diminishing marginal returns still exist
    • existence of a max total ouput proves existence of diminishing marginal returns
    • increasing labor productivity >> increases capital flow >> increases standard of living
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