Law of diminishing returns

Unfortunately, these large increases in output cannot be maintained as still more workers are hired. Look what happens when a third worker is hired. Total jeans production continues to increase. But the increase from point C to point D in Figure 5.1 is only 10 pairs per day. Hence the MPP of the third worker (10 pairs) is less than that of the second (19 pairs). Marginal physical product is diminishing.

What accounts for this decline in MPP? The answer again lies in the ratio of labor to other factors of production. A third worker begins to crowd our facilities. We still have only one sewing machine. Two people cannot sew at the same time. As a result, some time is wasted as the operators wait for their turns at the machine. Even if they split up the various jobs, there will still be some downtime, since measuring and cutting are not as time-consuming as sewing. In this sense, we cannot make full use of a third worker. The relative scarcity of other inputs (capital and land) constrains the marginal physical product of labor.

Resource constraints are even more evident when a fourth worker is hired. Total output increases again, but the increase this time is very small. With three workers, we got 44 pairs of jeans per day (point D);with four workers, we get a maximum of 48 pairs (point E).Thus the marginal physical product of the fourth worker is only 4 pairs of jeans. A fourth worker really begins to strain our productive capacity to the limit. There simply aren't enough machines to make productive use of so much labor.

If a seventh worker is hired, the operators get in each other's way, argue, and waste denim. As we observed earlier, total output does not increase at all when a seventh worker is hired. The MPP of the seventh worker is zero. The seventh worker is being wasted, in the sense that she contributes nothing to total output. This waste of scarce resources (labor) was commonplace in communist countries, where everyone was guaranteed a job. At Tight Jeans, however, they do not want to hire someone who doesn't contribute to output. And they certainly wouldn't want to hire an eighth worker, since total output actually declines from 51 pairs of jeans (point H in Figure 5.1) to 47 pairs (point I) when an eighth worker is hired. In other words, the eighth worker has a negative MPP.

The problem of crowded facilities applies to most production processes. In the short run, a production process is characterized by a fixed amount of available land and capital. Typically, the only factor that can be varied in the short run is labor. Yet, as more labor is hired, eachunit of labor has less capital and land to work with.This is simple division: the available facilities are being shared by more and more workers. At some point, this constraint begins to pinch. When it does, marginal physical product starts to decline. This situation is so common that it is the basis for an economic principle: the law of diminishing returns. This law says that the marginal physical product of any factor of production (e.g., labor) will begin to diminish at some point, as more of it is used in a given production setting.

The limited availability of space or equipment is the cause of diminishing returns. Once we have purchased or leased a specific factory, it sets a limit to current jeans production. When such commitments to fixed inputs (e.g., the factory) exist, we are dealing with a short-run production problem. If no land or capital were in place — if we could build or lease any size factory — we would be dealing with a long-run decision. In the long run we might also learn new and better ways of making jeans and so increase our production capabilities. For the time being, however, we must accept the fact that the production function in Figure 5.1 defines the short-run limits to jeans production. Our short-run objective is to make the best possible use of the factory we have acquired.

1. Which of these statements expresses the main idea of the text?

a) The marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs.

b) The limited availability of space and equipment is the cause of diminishing returns.

c) Short run is the period in which the (quality) of some inputs cannot be changed.

d) Large increases in output cannot be maintained as still more workers are employed.

2. Find in the text English equivalents of these words and phrases.

1. підтримувати, утримувати	11. час простою	21. обмежувати
2. зменшуватися	12. дефіцит, недостача	22. закон зменшуваної доходності
3. причина, підстава	13. очевидний, явний	23. причина
4. занепад, спад	14. напружувати(ся), натягати	24. купувати
5. коефіцієнт співвідношення робочої сили до інших факторів виробництва	15.виробнича потужність	25. здавати (брати) в оренду
6. тіснитися	16. робити вклад, сприяти	26. вручення
7. виробничі приміщення	17. загальне місце	27. постійні витрати
8. марнувати час	18. виробничий процес	28.виробнича спроможність
9. чекати своєї черги	19. підрозділ, відділ	29. одержувати
10. розділяти на частини	20.ділити(ся), розподіляти

3. Are these statements true or false? Correct the false ones.

a) Output tends to increase at a diminishing rate when more labor is employed in a given facility.

b) Additional workers "crowd" existing facilities, leaving each worker with less space and-machinery to work with.

c) The problem of crowded facilities applies to some production processes.

d) As less labor is hired, each unit of labor has more capital and land to work with.

e) The law of diminishing returns says that the marginal physical product of any factor of production will begin to diminish at some point.

f) One of the long-run objectives is to make the best possible use of the factory.

4. Find in the right column definitions of the terms.

1. supply 2. factors of production 3. production function 4. marginal physical product 5. law of diminishing returns 6. short-run 7. long-run

a) The marginal physical product of a variable input declines as more of it is employed with a given quantity of other fixed inputs. b) The change in total output associated with one additional unit of input. c) The period in which the quantity and quality of some inputs cannot be changed. d) The ability and willingness to sell (produce) specific quantities of a good at alternative price in a given time period. e) Resources inputs used to produce goods and services. f) A technological relationship expressing the minimum quantity of a good attainable from different combinations of factors inputs. g) A period of time long enough for all inputs to be varied.

5. Write a summary of the text.

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