What is Diminishing Marginal Productivity of Labor?
What is Diminishing Marginal Productivity of Labor?
Diminishing Marginal Productivity of Labor is a concept in economics that says:
- As you add more workers to a fixed amount of capital (like machines, tools, or land), the additional output produced by each new worker will eventually decrease.
In simple terms:
- The first worker you hire will produce a lot.
- The second worker will add less to the total output.
- The third worker will add even less, and so on.
This happens because resources are limited. For example, if you have one machine and keep adding workers, the machine can only do so much, and workers will start getting in each other’s way.
Example to Understand Diminishing Marginal Productivity
Imagine a farmer in India who owns a small piece of land (fixed capital) and hires workers to grow crops:
- 1 Worker: The farmer hires one worker. This worker can plow the field, sow seeds, and water the crops efficiently. The output is high.
- 2 Workers: The farmer hires a second worker. Now, the two workers can divide the tasks and work faster. The total output increases, but not as much as before (diminishing returns start).
- 3 Workers: The farmer hires a third worker. Now, the field is crowded, and the workers start getting in each other’s way. The total output increases, but only slightly.
- 4 Workers: The farmer hires a fourth worker. Now, the field is too crowded, and the workers have less space to work. The total output may even decrease.
This is diminishing marginal productivity of labor in action.
Key Points to Remember
- Fixed Capital:
- Diminishing marginal productivity happens when capital (like land, machines, or tools) is fixed. If you increase capital, the productivity of labor can increase again.
- Short-Run Concept:
- This concept applies to the short run, where at least one factor of production (like capital) is fixed.
- Not About Laziness:
- Diminishing productivity is not because workers are lazy. It’s because resources are limited, and adding more workers leads to inefficiency.
Mathematical Explanation
- Total Product (TP): Total output produced by all workers.
- Marginal Product (MP): Additional output produced by one more worker.
| Number of Workers | Total Product (TP) | Marginal Product (MP) |
|---|---|---|
| 1 | 10 units | 10 units |
| 2 | 18 units | 8 units |
| 3 | 24 units | 6 units |
| 4 | 28 units | 4 units |
| 5 | 30 units | 2 units |
- Here, the marginal product decreases as more workers are added.
Graphical Representation
- The Total Product (TP) curve initially rises steeply but flattens out as more workers are added.
- The Marginal Product (MP) curve slopes downward, showing diminishing returns.
Connection to Other Concepts
- Law of Diminishing Returns:
- Diminishing marginal productivity of labor is part of the Law of Diminishing Returns, which states that as you add more of a variable input (like labor) to a fixed input (like capital), the marginal product will eventually decrease.
- Production Function:
- The production function shows the relationship between inputs (like labor and capital) and output. Diminishing marginal productivity is a key feature of the short-run production function.
- Cost Curves:
- Diminishing marginal productivity affects a firm’s cost curves:
- As productivity decreases, the cost of producing each additional unit (marginal cost) increases.
- Diminishing marginal productivity affects a firm’s cost curves:
- Wages and Employment:
- Firms hire workers up to the point where the marginal product of labor equals the wage rate. If productivity decreases, firms may hire fewer workers.
Real-Life Examples
- Agriculture in India:
- A farmer with a small piece of land will see diminishing returns if they keep adding workers. After a point, more workers won’t increase output significantly.
- Factories:
- In a factory with a fixed number of machines, adding more workers will eventually lead to overcrowding and lower productivity.
- Restaurants:
- In a small kitchen, adding more chefs will initially increase output, but after a point, the kitchen becomes too crowded, and productivity decreases.
Common Mistakes in Exams
- Confusing Marginal Product with Total Product:
- Marginal product is the additional output from one more worker, while total product is the total output from all workers.
- Ignoring Fixed Capital:
- Diminishing marginal productivity only happens when capital is fixed. If capital increases, productivity can rise again.
- Thinking It’s About Worker Laziness:
- Diminishing productivity is not because workers are lazy. It’s because resources are limited.
How to Write About Diminishing Marginal Productivity in Exams
- Define the Concept:
- Start by defining diminishing marginal productivity of labor. For example:
- “Diminishing marginal productivity of labor refers to the decrease in additional output produced by each additional worker when capital is fixed.”
- Start by defining diminishing marginal productivity of labor. For example:
- Explain with an Example:
- Use a simple example, like a farmer or a factory, to explain the concept.
- Draw a Diagram:
- Draw the Total Product (TP) and Marginal Product (MP) curves to show how output changes as more workers are added.
- Connect to Other Concepts:
- Link diminishing marginal productivity to the Law of Diminishing Returns, production function, and cost curves.
- Conclude:
- Summarize the concept and its importance. For example:
- “Diminishing marginal productivity of labor is a key concept in economics that explains how adding more workers to a fixed amount of capital eventually leads to lower productivity. It helps firms make decisions about hiring and production.”
- Summarize the concept and its importance. For example:
Sample Exam Question and Answer
Question: What is diminishing marginal productivity of labor? Explain with an example.
Answer:
Diminishing marginal productivity of labor refers to the decrease in additional output produced by each additional worker when capital is fixed. This happens because resources like land, machines, or tools are limited, and adding more workers leads to inefficiency.
For example, consider a farmer in India who owns a small piece of land. When the farmer hires the first worker, the worker can plow the field, sow seeds, and water the crops efficiently, producing a high output. When the farmer hires a second worker, the two workers can divide tasks and work faster, but the additional output is less than before. As more workers are added, the field becomes crowded, and workers start getting in each other’s way. The additional output from each new worker decreases, showing diminishing marginal productivity.
This concept is part of the Law of Diminishing Returns and is important for firms when deciding how many workers to hire. It also affects cost curves, as lower productivity leads to higher marginal costs.