6.5 : Marginal Product II

The marginal product (MP) of a variable input measures the additional output produced by adding one more unit of that input, holding all other inputs constant. MP is typically studied in the short run, where at least one input (usually capital) is fixed.

Production typically progresses through three stages. These stages are related to the marginal product of the variable input. The three stages are:

1. Stage of Increasing Marginal Returns: In this initial phase, the addition of variable input leads to an increase in output, where each new unit of input contributes more to production than the previous one. MP is increasing at this stage. This stage may reflect how additional variable input such as labor allows for the team of workers to specialize in specific tasks to increase individual productivity.
2. Stage of Diminishing Marginal Returns: As the variable input is increased, the production process enters a phase where each subsequent unit of input adds less to the total output than the one before, so the overall production increases but at a diminishing rate. MP is positive but decreasing at this stage. This stage may reflect how additional labor decreases the time that each worker now has to access the fixed quantity of capital, preventing each worker from maintaining the same level of individual productivity as before.
3. Stage of Negative Marginal Returns: In this stage, a further increase in the quantity of the variable input decreases the total output. Here, the marginal product of the variable input becomes negative. This stage may reflect how the additional labor has created such crowded conditions in the workplace that mistakes and accidents become much more frequent, causing the total output to actually decline.