Marginal Returns and Free Is Not Free

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  • Topic: Costs, Diminishing returns, Economic cost
  • Pages : 3 (925 words )
  • Download(s) : 395
  • Published : October 27, 2011
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After two quarters of increasing levels of production, the CEO of Canadian Fabrication & Design was upset to learn that, during this time of expansion, productivity of the newly hired sheet metal workers declined with each new worker hired. Believing that the new workers were either lazy or inefficiently supervised (or possibly both), the CEO instructed the shop foreman to "crack down" on the new workers to bring their productivity levels up. ◦Explain carefully in terms of production theory why it might be that no amount of "cracking down" can increase worker productivity at CF&D. ◦Provide an alternative to cracking down as a means of increasing the productivity of the sheet metal workers. Fully explain your alternative in terms of production theory.

This scenario where adding more workers or employees results in a diminished productivity is a classic example of the principle of diminishing marginal returns to a variable input. The concept, as discussed by Thomas and Maurice on page 296 states that the law of diminishing marginal product is “the principle that as the number of units of the variable input increases other inputs held constant, a point will be reached beyond which the marginal product decreases. For example, I work in a pastry shop and we make cakes. I typically schedule three bakery employees to make 90 cup cakes in three hours. That averages 30 cupcakes per employee in that three-hour time span. Assuming the variable being the number of employees all else remaining constant. If I add a fourth, fifth, or sixth employee I should get 30 cup cakes produced for every additional employee I add. The concept: law of diminishing marginal product, theorizes that at some point this will not be so. When the fifth or sixth baker shows up something happens, I run out of oven space, utensils, equipment, space, etc. All the bakers can’t possibly make 30 cup cakes each at the same time and things slow down. It then starts to take...
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