Wednesday, 2 March 2016. On the second day of learning this topic, he give us a objectives that we need to know when we study this topic.
Law of
Diminishing Marginal Returns
The law of diminishing marginal returns is the law of
economics stating that, as the number of new employees increases, the marginal
product of an additional employee will at some point be less than the marginal
product of the previous employee. It also can be explained with the help of a
table showing the production of a firm.
Let us define the total product, average product and marginal
product.
Total Product
(TP)
Total Product (TP) is the sum total of output produced by all
the units of a variable factor along with some constant amount of the fixed
factors used in the process of production.
Average
product (AP)
Average
Product is the output per unit of the variable factor and be obtained by
dividing the total product by the amount of that used. In this case, labor is
used.
Average product = Total Product
(TP)
Total Labor (L)
Capital (K) can be
also used and the AP formula will be as below.
Average product = Total Product
(TP)
Total Labor (L)
Marginal product (MP)
Marginal
product is the change in the total product of that input corresponding to an
addition or unit change in its labor. Marginal product is the additional to
total product when one more unit of labor is employed.
Marginal
product (MPL) = Changes in total product
Change in total labor (L)
If capital
is used as a variable input, marginal product is calculate as below:
Marginal
product (MPK) = Changes in total product
Change in total labor (K)
The table
shows below the relationship between output and labor when the capital is
fixed. The diagrams show the relationship between AP, MP and TP.
L (units of labor)
|
TP (Total Product)
|
AP(Average Product)
|
MP (Marginal Product)
|
1
|
50
|
50
|
50
|
2
|
90
|
45
|
40
|
3
|
120
|
40
|
30
|
4
|
140
|
35
|
20
|
5
|
150
|
30
|
10
|
6
|
150
|
25
|
0
|
7
|
147
|
21
|
-3
|
Relationship between total product (TP) and marginal product (MP).
When MP is
increasing, TP will increase at an increasing rate. When MP is decreasing, TP
will increase a decreasing rate. When MP is zero, TP is at a it’s maximum. When
MP is negative, TP declines.
Relationship between marginal product (MP) and average
product (AP).
When MP is
above AP, AP is increasing. When MP is below AP, AP is decreasing. When MP is
equals to AP, AP is at maximum.
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