Marginal Product of Labour

The marginal product of labour is the change in output that results from employing an added unit of labour. In economics, the marginal product of labour is the change in output that results from employment an added unit of labour. This is not always equivalent to the output directly produced by that added unit of labour.

For example, employing an additional cook at a restaurant may make the other cooks more efficient by allowing more specialization of tasks, creating a marginal product that is greater than that produced directly by the new employee.

Conversely, hiring an additional worker onto an already crowded factory floor may make the other employees less productive, leading to a marginal product that is lower than the work done by the additional employee.

  • The marginal product of labour is not always equivalent to the output directly produced by that added unit of labour.
  • When Production is discrete, we can define the marginal product of labour as change in output / change in labour.
  • When production is continuous, the marginal product of labour is the first derivative of the production function in terms of labour.
  • Graphically the marginal product of labour is the slope of the production function.
  • The law of diminishing marginal returns ensures that in most Industries the marginal product of labour will eventually be decreasing.

Law of Diminishing Marginal Product

The law of diminishing marginal product depicts a specific system where an increase in any one production variable while keeping other variables constant, initially increasing the overall production of the system. However, a further increase in that particular variable will generate lesser returns.

In simple terms, as per the law of diminishing marginal product or productivity increasing only one factor of production for a particular unit will bring in more returns but only past a certain point of increase.

This law does not always imply that the addition of production variables will decrease overall productivity in the long run but it is usually the case.

  • Diminishing marginal productivity typically occurs when advantageous changes are made to input variables affecting total productivity.
  • The Law of diminishing marginal productivity states that when an advantage is gained in a factor of production, the productivity gained from each subsequent unit produced with only increase marginally from one unit to the next.
  • Production managers consider the law of diminishing marginal productivity when improving variable inputs for increased  production and profitability.

The law of Variable Proportions

The law of variable proportions is a new name for the law of diminishing returns, a concept of classical economics. But before getting on with the law, there is a need to understand the total product, marginal product and average product.

Total Product

Total product is the total output obtained from the combined efforts of all the factors of production. Further, if we wish to find the effect of one factor of production, say labour, on the total product, we need to keep all the factors constant. In this case, the total product would vary with the factor kept variable.

Marginal Product

The change in the total product when one more unit is added to the variable factor is known as the marginal product.

Average Product

Average product is the total product per unit of the variable factor. In other words, it is the ratio of total production to the quantity of variable factor.

The Relationship between Average product and Marginal product

  • When there is a rise in the average product due to an increase in the quantity of the variable input, the marginal product is more than the average product.
  • The maximum average product is equal to the marginal product. Simply put, the maximum point of the average product curve is also a point on the marginal product curve, a point where both of these curves intersect.
  • When the average product falls, the marginal product is less than the average product.

The Law of Diminishing Returns

The law of diminishing returns operates in the short run when we can’t change all the factors of production. Further, it studies the change in output by varying the quantity of one input.

Technically the law states that as we increase the quantity of one input which is combined with other fixed inputs, the marginal physical productivity of the variable input must eventually decline.

In simple words, the total productivity for a given state of Technology is bound to increase with an increase in the quantity of a variable input.

However, as the quantity of the input keeps on increasing the marginal product rises to a maximum then starts to decline and eventually becomes negative.

This is because the crowding of inputs eventually leads to a negative impact on the output. Lastly, the law of diminishing returns also comes with some assumptions :

  • We assume the state of technology to be constant. A variable state of Technology would impact the marginal and average product. In that case we would not be able to accurately study the relationship between output and the fixed input.
  • Only one input should be variable. Keeping other inputs constant. This law does not apply to cases when all the inputs vary proportionately. In that case, the returns to scale comes to the rescue.
  • The law does not apply to a production scenario where we require specifically fixed proportions of inputs. In such a case, an increase in in any output input would not have any impact on production, since the marginal product will be always equal to zero.
  • We considered only physical inputs and outputs and not economic profitability in monetary terms.

We can divide the behaviour of output when varying one input, keeping other inputs fixed in the short run into three stages :

Stage I :- Increasing Returns

We characterize this stage with the total output increasing at an increasing rate with each additional unit of the variable input. It is also known as the point of inflexion.

We get increasing returns in the first stage because initially, the fixed factors are abundant relative to the variable factors.

The introduction of additional units of the variable factor leads to the effective utilisation of the fixed factors. Evidently, production increases at an increasing rate.

Stage II :- Diminishing Returns

Throughout the stage of diminishing returns, the total product keeps on increasing. However unlike the stage of increasing returns, here the total product increases at a diminishing rate.

This happens because the marginal product falls and becomes less than the average product which also sees a downward slope. Thus, this stage is known as the stage of diminishing returns.

The end of this stage is marked by the total product attaining its maximum value and the marginal product becomes zero. Further, this stage is very important because the firm will seek to produce in its range.

Stage III :- Negative Returns

The origin of stage three starts from the maximum point of the total product curve. In this stage, the total product curve now starts to decline. Moreover, the marginal product curve becomes negative coupled with the fall in the average product curve.

The excessive addition of variable inputs leads to a negative return at this stage. This is because of the crowding of the variable factors.

The variable and fixed factors now start getting into each other ways. Effectively, there is no coordination and hence the output falls.


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