Principles of Microeconomics / Unit 6 MIC 0511 worked example, 60 to 90 seconds
Building a Marginal Product Column
The idea
From a table of workers and total output, marginal product is each row's output minus the row before. Write the differences between the rows. Then read the column: where it rises, marginal returns are increasing, usually from specialization; where it falls but stays positive, diminishing returns have set in; where it turns negative, the next worker reduces output. Name the worker at which diminishing returns begin, which is the first one whose marginal product is smaller than the one before.
In practice
Worked example: the bakery's output with zero to five workers is zero, twenty, fifty, seventy, eighty and eighty-five loaves. The marginal products are twenty, thirty, twenty, ten and five. The second worker raised the marginal product, so returns increase up to two workers. The third worker's twenty is below the second's thirty, so diminishing returns begin with the third. No worker in the table has a negative product; output rises throughout.
Where people slip
Do not read diminishing returns off total output, which keeps rising all the way. Read it off the differences. And do not call the fall in marginal product a fall in output; eighty-five loaves is still the most the table shows.
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