Civil Engineering Reference
In-Depth Information
Figure 7.2a
A production function
A production function relates outputs to inputs. We have merely taken the numbers
from columns 1 and 2 of
Table 7.1
and presented them as a graph.
180
150
120
90
60
30
0
1
2
3
4
5
6
7
8
Labour input
The same analysis holds for firms in their use of productive inputs. When the
returns from hiring more workers are diminishing, it does not necessarily mean that
more workers will not be hired. In fact, theoretically, workers should be hired until
the returns, in terms of the value of the extra output produced, are equal to the
additional wages that have to be paid for those workers to produce the extra output.
Before we get into the decision-making process, let us demonstrate that diminishing
returns can easily be represented graphically and subsequently used in our analysis
of the firm.
Measuring Diminishing Returns
How do we measure diminishing returns? First, we will limit the analysis to only one
variable factor of production (or input). Let us say that factor is labour. Every other
factor of production, such as machinery, must be held constant. Only in this way
can we calculate the marginal returns from using more workers and know when we
reach the point of diminishing marginal returns.
Marginal returns for productive inputs are sometimes referred to as the
marginal physical product
. The marginal physical product of a worker, for
example, is the change in total product that occurs when that worker joins an
already existing team. It is also the change in total product that occurs when
a worker resigns or is laid off from an already existing construction project. The
marginal productivity of labour, therefore, refers to the change in output caused by
a one-unit change in the labour input.
