Marginal product of labor and average relationship

Product: Total, Marginal and Average Tutorial | Sophia Learning

marginal product of labor and average relationship

Businesses measure productivity in two ways: marginal and average. and trying to assess its labor needs, average productivity is the better measurement. The relationship between the marginal product of labor and the marginal cost helps determine whether it is worthwhile to produce additional products. There is a specific relationship between the marginal product of labor and the average product of labor. For the following parts of this question, use the following.

The other side is occupied by the aggregate supply curve which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve.

Relationship Between Marginal & Average Productivity | stapelholm.info

The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect. A mathematical connection between average product and marginal product stating that the change in the average product depends on a comparison between the average product and marginal product.

If marginal product is less than average product, then average product declines. If marginal product is greater than average product, then average product rises. If marginal product is equal to average product, then average product does not change.

The relation between average product and marginal product is one of several that reflect the general relation between a marginal and the corresponding average. The general relation is this: If the marginal is less than the average, then the average declines. If the marginal is greater than the average, then the average rises. If the marginal is equal to the average, then the average does not change.

This general relation surfaces throughout the study of economics.

  • Marginal product of labor
  • Explain the Relationship Between the Marginal Product of Labor & Marginal Cost

It also applies to average and marginal costaverage and marginal revenueaverage and marginal propensity to consumeand well, any other average and marginal encountered in economics. Making Tacos Average and Marginal Product The graph at the right for the hourly production of Super Deluxe TexMex Gargantuan Tacos with sour cream and jalapeno peppers illustrates the relation between average product and marginal product. Marginal Greater Than Average: For the first few quantities of variable input workersmarginal product is rising and lies above average product.

This is consistent with an increasing average product. If Waldo proprietor of Waldo's TexMex Taco World hires an additional worker in this early stage of production, then the marginal product that is the extra contribution of this worker is greater than that of the existing workers. This, as such, increases the average for all workers. Even after the law of diminishing marginal returns kicks in, and marginal product declines, average product continues to increase because the marginal exceeds the average.

And all I've done is I've taken total and divided by the quantity, or the number of employees. So this tells us that, for example, let's say we have three employees, that on average each employee is producing If we were to graph it-- again, your average is this curve right here-- it goes up at first and then falls, just as marginal went up and then fell like that.

Let's talk about actually these two curves and how they're related to one another. So here, where the marginal lies above the average, that would be from here to the left.

The marginal is up above the average. Notice how it's pulling the average up. If I were to use a sports analogy-- I think that actually helps before I go into this specific example-- If I were to use a sports analogy, let's say that a quarterback has a certain average.

Let's say we're talking about his average touchdown passes per game. And let's say that his average right now is, on average, he's passing two. So he has two average touchdown passes per game.

Short-Run Production: Marginal Product and Average Product

That would be, obviously, this curve-- his average. The marginal represents his next game, his next performance.

marginal product of labor and average relationship

Because marginal means your additional thing. So if, in the next game, he has a really great game and he has, let's say, five touchdown passes, won't that bring his average of two up? That's what's going on here.

marginal product of labor and average relationship

So with marginal and average product of labor, when we're here, to the left of this spot, adding another worker, one more, will add more than the average to output. So we'll pull that average up.

As soon as that quarterback now has a really bad game, his marginal performance let's say is 0 touchdown passes, that's going to pull his average down.

And that's where the marginal lies below the average. So where a marginal lies below the average, it's going to pull it down. And that would mean that adding another worker will add less than the average to output.

It doesn't mean necessarily that they're going to bring overall output down, it just means that they're going to add less than the average to output. And that brings us to a concept called diminishing marginal product, which says that the marginal product of capital or labor will begin to fall at some point, holding everything else constant. So right here-- I said I would be talking to you about why the curves were shaped the way that they are. Notice how total product is increasing except when we hire the sixth employee.

But it's increasing at different rates, and that's what marginal product measures. It measures the rate at which total product is changing. And at first-- look at how the second employee, what he adds to the firm. He adds actually more than even the first worker. Why would that be?

Well if you think about it, specialization can kind of explain that. With two people, can't you get so much more done than with just one person? But remember, in the short run, there's a fixed input.

marginal product of labor and average relationship

And so there's fixed amount of stuff for these workers to work with. So at some point-- I just have it set in pretty quickly here to prove my point-- but at some point, specialization kind of runs out. And yeah, hiring more workers is still going to help you produce more. But the next worker won't be as good as the one before.

Because there's just not enough stuff for them all to do, all to have specialized devoted tasks. So here, I'm drawing an arrow to where diminishing marginal product sets in, at the third worker. Total product is still increasing. Hiring another worker or investing in a new machine for capital would still help to increase your numbers, just not as much as the one before. And that's what diminishing marginal product is all about.

Here we would never want to hire a seventh employee. Because more than likely, that would be where they would actually bring down production. That's at the point where they're getting in each other's way, and it's actually less productive to have another employee. That's not what diminishing marginal product is, though.

So how is it that a firm uses all of this information?

Relationship Between Marginal & Average Productivity

OK, now we need to bring everything together. And we need to link it to the revenue that they can generate and how much it's going to cost us to hire these inputs. So we need to look at the price of the product that they're selling and the cost of labor or capital to the firm. And that's where the marginal revenue product is going to come in.

marginal product of labor and average relationship

So marginal revenue product is the additional sales revenue received from employing one more unit of labor, or capital. And again, I'm sticking with the labor example.