What is marginal productivity what is the significance of this concept

We also can return to our previous example of a chocolate cake; adding more chocolate to the batter initially improves the taste of the cake, but adding even more chocolate will eventually detract from the taste of the cake. As stated by others, if diminishing marginal productivity was not a reality, we could raise all the food we need in a flower pot by simply adding more seed, fertilizer, water, etc. An almost endless list of examples could be developed to illustrate diminishing marginal productivity.

Diminishing marginal productivity is a natural phenomenon that economists recognize and incorporate into their thinking and analysis. The following sections explain the impact of diminishing marginal productivity. The impacts of the concept are illustrated with the production function and cost curves.

The discussion also considers how the concept of diminishing marginal productivity influences decision making. An assumption is that the manager wants to increase profit as quickly as possible , but this also implies there will not be enough time to increase ALL inputs, so the business will increase only SOME inputs. Restated, assuming that the manager wants to increase profit as soon as possible, there is not enough time to change the level of all inputs.

Not being able to change some inputs is defined as the short-run -- not enough time to change all inputs. The manager will try to change the level of production by changing only the level of variable inputs. Restated, there will be both fixed inputs and variable inputs. A fixed input is any input that cannot be changed in the time period the manager is contemplating. Diminishing marginal productivity is the concept that using increasing amount of some inputs variable inputs during the production period while holding other inputs constant fixed inputs will eventually lead to decreasing productivity.

Diminishing marginal productivity is a natural phenomenon that humans cannot avoid or eliminate. The inability to change the level or quantity of at least one input due to the shortness of time is designated in economic theory as the short run. The long run , by comparison, means the business manager is contemplating a period of time that is long enough to alter or change all of the business assets. Buying additional flour or hiring another worker for a bakery usually can be accomplished in a relatively short time whereas constructing an addition to a building or buying another truck generally takes longer.

If the business manager is contemplating a time frame in which additional flour can be purchased but the building cannot be expanded, economic theory would call that the short run because there is not enough time to change all the assets the business is using. If the business manager, however, is considering a time period long enough to change all the business assets, including an expansion of a building, for example, economic theory would describe that as the long run.

Many management decisions are made with the manager contemplating the short run; that is, enough time to change some inputs but not all inputs. The implication of thinking about the short-run is addressed again in a subsequent section.

Managerial decisions are often made under circumstances where the manager cannot alter all inputs being used in the production process. Instead, the manager can make some changes but has to rely on and use other resources as they currently exist; there just is not enough time to change everything.

The concept of diminishing marginal productivity assumes the manager is making decisions to maximize profit in the short run. The discussion on these pages assumes the short-run; that is, the manager wants to increase profit as quickly as possible. There is not enough time to increase all inputs; the business will try to increase output by increasing only some inputs. The short-run introduces another economic concept -- fixed inputs and variable inputs.

As already stated, in the short-run the quantity of some inputs can be changed but the quantity of other inputs cannot be altered. Economic theory refers to the inputs that can be changed as variable inputs and the inputs that cannot be altered in this time period as fixed inputs. Fixed inputs are those that cannot be easily altered.

For example, land leased on a 3-month basis may be a variable input rather than a fixed input, but land that is leased on a 7-year contract may be relatively fixed. In the first case, the manager could discontinue leasing the land within 3 months whereas as the second manager is "stuck" with the land for as long as seven years even if the manager no longer wants to use the land.

Owned land may be more of a variable input than leased land. It may be easier to sell a tract of land if it is no longer needed than it may be to get out of a long-term lease agreement. Even though owned land is often used as an example of fixed input, it may not be a fixed asset if there are opportunities to sell it in a short time.

A piece of equipment that can be readily sold may be a variable input whereas a piece of specialized equipment that no one else is interested in buying would be a fixed input.

Some labor or workers might be a variable input -- hourly workers who can be told to "stay home today" because there is no work for them. Other workers, however, may be a fixed input such as those who are hired under a several-year contract that need to be paid even if there is no work for them.

Consider a family business. Is the labor provided by family members a variable input or a fixed input? How easy is it to "discharge" a family member if their labor is no longer needed in the family business? Bottom line -- a fixed input is one that is not easily acquired or disposed of whereas inputs that can be easily bought and sold even though they have a long useful life may be viewed as a variable input.

Do not confuse the economic definition of a fixed input with an asset that has a long useful life. Fixed inputs become variable inputs as 1 the manager extends the time period being considered in the decision making process and 2 as the input reaches the point that it needs to be replaced.

For example, a item of specialized equipment as suggested above is a fixed input if there is limited opportunity to sell the item. However, as the item grows old and reaches the end of its useful life, the manager now has an opportunity to decide whether to replace it or simply quit using it.

At this point, this specialized equipment may shift in the manager's mind from being a fixed input to being a variable input. The description of fixed inputs are addressed again in subsequent sections.

Examples of cost associated with a fixed input include depreciation, maintenance, interest on debt associated with the asset, and opportunity cost of equity invested in the asset. An important characteristic of a fixed input is that even if a fixed input is not being used, its cost is still being incurred.

For example when a business decides to cease operation, the manager can eliminate the variable cost by not using any of the variable input perhaps electricity , but the cost associated with the fixed inputs which cannot be immediately disposed of will continue to be incurred by the business e.

The concept of diminishing marginal productivity is apparent as managers make decisions in the short-run; that is, "how much variable input should I combine with my fixed inputs to achieve my goal of maximizing profit during this production period.

In the short run, there is not enough time to change the quantity of all inputs. The inputs that can be changed are referred to as variable input and their costs are variable costs. By comparison, inputs that cannot be changed are referred to as fixed inputs and result in fixed costs. In the long-run, all inputs can be altered; restated, all inputs and all costs are variable in the long-run. A manager cannot add increasing amounts of variable input to fixed inputs during a production period without eventually decreasing output.

The next section illustrates an application of the concept of diminishing marginal productivity with a description of the production function. Agriculture Law and Management Accessibility. Info Share. The law of diminishing marginal productivity involves marginal increases in production return per unit produced. It can also be known as the law of diminishing marginal product or the law of diminishing marginal return. In general, it aligns with most economic theories using marginal analysis.

Marginal increases are commonly found in economics, showing a diminishing rate of satisfaction or gain obtained from additional units of consumption or production. The law of diminishing marginal productivity suggests that managers find a marginally diminishing rate of production return per unit produced after making advantageous adjustments to inputs driving production.

When mathematically graphed this creates a concave chart showing total production return gained from aggregate unit production gradually increasing until leveling off and potentially starting to fall. Different than some other economic laws, the law of diminishing marginal productivity involves marginal product calculations that can usually be relatively easy to quantify. Companies may choose to alter various inputs in the factors of production for various reasons, many of which are focused on costs.

In some situations, it may be more cost-efficient to alter the inputs of one variable while keeping others constant. However, in practice, all changes to input variables require close analysis. The law of diminishing marginal productivity says that these changes to inputs will have a marginally positive effect on outputs. Thus, each additional unit produced will report a marginally smaller production return than the unit before it as production goes on.

The law of diminishing marginal productivity is also known as the law of diminishing marginal returns. Marginal productivity or marginal product refers to the extra output, return, or profit yielded per unit by advantages from production inputs.

Inputs can include things like labor and raw materials. The law of diminishing marginal returns states that when an advantage is gained in a factor of production, the marginal productivity will typically diminish as production increases.

This means that the cost advantage usually diminishes for each additional unit of output produced. In its most simplified form, diminishing marginal productivity is typically identified when a single input variable presents a decrease in input cost. A decrease in the labor costs involved with manufacturing a car, for example, would lead to marginal improvements in profitability per car.

However, the law of diminishing marginal productivity suggests that for every unit of production, managers will experience a diminishing productivity improvement. This usually translates to a diminishing level of profitability per car. Diminishing marginal productivity can also involve a benefit threshold being exceeded. For example, consider a farmer using fertilizer as an input in the process for growing corn. Each unit of added fertilizer will only increase production return marginally up to a threshold.

At the threshold level, the added fertilizer does not improve production and may harm production. In another scenario consider a business with a high level of customer traffic during certain hours. The business could increase the number of workers available to help customers but at a certain threshold, the addition of workers will not improve total sales and can even cause a decrease in sales.

What would happen if the student studied for an extra hour each day? Or an extra two hours? How would their grade rise? In economics, marginal productivity refers to the additional amount produced when you add one additional unit of a particular factor, such as an additional man hour of labor. What determines how many units of a product are produced? Ask a business owner, and they will probably say that it depends how many items the company can sell, or how much capital it can raise to invest in production facilities.

Economists add something else to the mix — so-called "factors of production" such as the factory, capital equipment and labor man hours it takes to create the product. According to the theory of marginal productivity, adding more factors of production allows you to increase the amount produced.

Looking at this from the other direction, it follows that producing more items will push up the cost of production, because you have introduced more factors of production.