Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less by Austin Frakt & Mike Piper

Author:Austin Frakt & Mike Piper [Frakt, Austin]
Language: eng
Format: epub
ISBN: 9780981454290
Publisher: Simple Subjects, LLC
Published: 2014-05-18T00:00:00+00:00

As mentioned in Chapter 4, a firm’s marginal cost of production is the additional cost it must incur to produce one more unit of output. A firm can face decreasing, constant, or increasing marginal costs of production, depending on its level of output, the expense of acquiring additional inputs, and the extent to which they can be used productively.

EXAMPLE: Pauline’s Pies is hiring additional employees to increase the number of pizzas the business makes per month. (In what follows, assume all employees are of equivalent skill.)

As shown in the following table, the first employee can produce 250 pizzas per month. Adding a second employee makes the first more productive: Together the first two employees can produce 600 pizzas per month—more than twice what the first employee could do alone. This might be possible if, for example, there are two tasks (e.g., preparing pizzas and tending to ovens) that can be done in parallel with two employees but that must be done sequentially by only one employee. When marginal output increases as more units of input are used, it is known as “increasing marginal returns” (in this case, increasing marginal returns from labor). It’s also known as “increasing returns to scale” (scale meaning size of the business).

The third employee increases production as much as the second did. Such leveling off of marginal output is known as “constant marginal returns” or “constant returns to scale.”

Starting with the fourth employee, each additional employee adds less additional production than the employee before—because there is insufficient space and equipment in the kitchen to keep these new employees fully busy. In fact, once there are five people working at a given time, the kitchen is so full that additional workers would actually reduce total production because they would just be getting in the way. In the language of economics, Pauline’s Pies faces “diminishing marginal returns from labor” or “decreasing returns to scale” after the third employee. That is, each additional unit of input (labor) brings less output (pizzas) than the previous unit.

Number of Employees Total Output (pizzas/month) Marginal Output (pizzas/month)

1 250 250

2 600 350

3 950 350

4 1,200 250

5 1,300 100

6 1,250 -50

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