Civil Engineering Reference
In-Depth Information
the relationship between marginal cost - that is, the cost of an extra unit of output
- and the incidence of diminishing marginal physical returns as illustrated in
Table 7.1.
Let us assume that each unit of labour can be purchased at a constant
price. Further assume that labour is the only variable input. We see that as more
workers are hired, the marginal physical product first rises and then falls after the
point at which diminishing returns are encountered. The marginal cost of each
extra unit of output will first fall as long as the marginal physical product is rising,
and then it will rise as long as the marginal physical product is falling. Consider
again the data in
Table 7.1
. Assume that a worker is paid £500 a week. When we
go from zero labour input to one unit, output increases by 20 square metres. Thus,
the labour cost per square metre (the marginal cost) is £25. Now the second unit of
labour is hired, and it, too, costs £500. Output increases by 40. Thus, the marginal
cost is £12.50 (£500 divided by 40). We continue the experiment. The next unit of
labour produces 60 additional square metres, so the marginal cost falls further to
£8.33 per square metre. The next labourer yields only 20 additional square metres,
Figure 7.2b
Diminishing marginal returns
Taking the data from
Table 7.1,
on the horizontal axis we plot the numbers of workers
and on the vertical axis we plot the marginal physical product in square metres per week.
When we go from zero workers to one worker, marginal product is 20. We show this at a
point between 0 and 1 worker to indicate that the marginal product relates to a change
in the total product as we add additional workers. When we go from one to two
workers, the marginal product increases to 40. After three workers, marginal product
declines. Therefore, after three workers, we are in the area of diminishing marginal
physical returns. Total product, or output, reaches its peak at seven workers. In fact
when we move from seven to eight workers, marginal product becomes negative.
60
45
30
15
0
1
2
3
4
5
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7
8
Labour input
