Law Marginal Productivity

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LAW OF DIMINSHING MARGINAL PRODUCTIVITY

Law of Diminishing Marginal Productivity and Relationship between Productivity and Cost

Abstract

Average productThe total output produced divided by the quantity of resource

Average variable costThe total variable cost divided by the output

ProductivityProductivity is a measure of output from planned resources of input

Fixed CostThe cost does not change with the level of outputs

Marginal costThe change in total variable cost divided by the change in output

Marginal productThe change in total product divided by the change in quantity of resource employed

Variable CostCost that varies directly with the level of output

WagesThe income earned by the labor

Law of Diminishing Marginal Productivity and Relationship between Productivity and Cost

This law states that: At a given state of technology, as more and more units of variable input factors are added to input factors that are fixed in supply in short run, the resulting increments to total production will eventually and progressively decline.

This law is also known as Law of Increasing Costs

Assumptions of the law:

  • Constant Technology: this law assumes that technique of production should remain unchanged during production
  • Short run: this law operates in short run
  • Homogeneous factors: each factor unit is assumed to be identical in amount and quality

Table:

(1)

Units of variable resource (Labor)

(2)

Total product (TP)

(3)

Marginal product (MP), Change in (2)/ Change in (1)

(4)

Average Product (AP), (2)/(1)

0

0

10

-

1

10

15

10.00

2

25

20

12.50

3

45

15

15.00

4

60

10

15.00

5

70

5

14.00

6

75

0

12.50

7

75

-5

10.71

8

70

8.75

(The table has been taken from McConnell, Campbell. R., & Brue, Stanley.L. (2005), p.396)

FIGURES:

FIGURE 1: (a) As a variable resource (labor) is added to fixed amounts of other resources (land or capital), the total product that results will eventually increase by diminishing amounts, reach a maximum and then decline.

FIGURE 2: (b) Marginal product is the change in total product associated with each new unit of labor. Average product is simply output per labor unit. Note that marginal product intersects average product at the maximum average product.

(The figures have been taken from McConnell, Campbell. R., & Brue, Stanley.L. (2005), p.397)

RELATIONSHIP BETWEEN PRODUCTIVITY AND COST

When the marginal product is rising , marginal cost falls. Similarly, when average product rises, average variable cost falls.

When the marginal product falls , marginal cost rises. Similarly, when average product falls, average variable cost rises.

For further clarification please refer to the McConnell, Campbell. R., & Brue, Stanley.L. (2005). Economics. International: McGraw-Hill, p.402

References

McConnell, Campbell. R., & Brue, Stanley.L. (2005). Economics. International: McGraw-Hill

Nasir, Saeed. M. (2007). Economics. Pakistan: Ilmi Kitab Khana