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Marginal Productivity and Marginal Cost
How we get a neoclassical supply curve.
And why it is wrong.
The BIG ideas• In the short-run, when other inputs like
machinery or buildings are fixed, marginal productivity falls because variable inputs (labor) run out of other inputs with which to work.
• Marginal costs rise because of diminishing marginal productivity. That makes the supply curve upward sloping
• In the long run, where no inputs are fixed, marginal productivity is constant or increasing. Therefore, the long-run supply curve is flat or downward sloping.
Thinking along the margin
How do you increase output?
Imagine, you are a farmer
Don’t laugh. Marijuana is the largest crop in California at $14 b. It is the largest for the US at $36 billion.http://www.drugscience.org/Archive/bcr2/cashcrops.html
To increase output, hire more workers to weed, water, feed, and prune.
The first workers are very productive. They are busy with lots to do.
You hire more workers. That doesn’t work so well.
Your farm is getting crowded. Your new workers are less productive because they have fewer plants, fewer tools, and less space with which to work.
A good manager, you make a spreadsheet of outputs and inputs
Workers Output (ounces)
Marginal Product of Labor (MPL) or (ΔQ)/L
Workers for marginal ounce.Inverse of MPL
(L/(ΔQ))
Marginal Cost for one more ounce
($10 times Workers)
1 10 10 0.1 $1.00 2 19 9 0.11 $1.10 3 27 8 0.13 $1.30 4 34 7 0.14 $1.40 5 40 6 0.17 $1.70 6 45 5 0.2 $2.00 7 49 4 0.25 $2.50 8 52 3 0.33 $3.30 9 54 2 0.5 $5.00
10 55 1 1 $10.00
Output rises when you add workers
But it increases at a diminishing rate.We call this diminishing marginal
productivity of labor.Because workers have less and less with
which to work, additional workers add less to your total output.
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Diminishing Marginal Productivity of Labor (or any other variable input!)
Output rises with inputs But at a diminishing rate
Why does the Marginal Productivity of Labor fall?
Because additional workers have less and less with which to work.
MC rises because MPL falls.
Because additional workers are less and less productive, you need to add more and more of them to get the same increase in output
Oops!
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Because more and more additional workers are needed to increase
output, output increases come at ever rising costs.
We call this increasing marginal costs
You may know that they grow pot in the hill towns around Amherst, MA.
The DEA also monitors electricity usage to find grow houses.
They do overflights to find “hot spots.” (Evidence of grow lamps).
Personally, I think that this is a waste.
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They also grow a lot of pot in Afghanistan. (And lots of heroin.)
That funds the Taliban. And the Afghan government. Strange.
The Obama Administration has stopped the persecution of
medical marijuana
Why do Marginal Costs rise?
Because marginal productivity falls.
You need more and more labor to get the same increases in output
More and more people to get the same increase in output means you
spend more and more
Piles of people Piles of money
Marginal Costs rise because marginal productivity falls
Because when you add workers, they run out of things to do and stuff with which to work.
But what would happen if you increased all inputs simultaneously?
Additional workers would have stuff to work with!
Marginal productivity of labor would not fall!
Marginal costs would not rise!
Inputs
Falling long run marginal costs
In the long run costs fall
Economies to scale and greater specialization and detail division of labor.
Learning by doing: the more you do, the better you get.
Improvements in technology with practice.
That is why we have become more efficient even while increasing employment.
Our long-run MPL curve is downward sloping.
If Marginal Costs do not rise in the long run, then what happens to the
long-run supply curve?
It is flat. Or downward sloping.
If the long-run supply curve is flat, then prices are flat, or even fall with
rising demand!Does this sound like
some products you use?
To lower costs (and prices), we should encourage consumption!
Take-away points
• Short-run marginal costs rise because of diminishing marginal productivity.
• Marginal productivity falls because of the ratio of variable to other inputs rises.
• In the long run, however, there are no fixed inputs and marginal productivity remains constant or increases. Therefore, long-run marginal costs don’t rise and the long-run supply curve is flat or falls.