Average product of labor

In the short-run, the law of diminishing returns states that as we add more labor to fixed capital the change in total output will first rise and then start to fall. This means that even though production will keep on rising with extra worker added the marginal product of labor decreases. Short-run production function can either be illustrated as a table, see table 1 or as a formula. The formula is: y = f(x1,x2,…,xn; k1, k2, .. kn) where y is quantity of output, x is the variable factors, x1 being the first one and k is fixed factors where k1 is the first one.

To calculate the average product of labor(APL) we can use the following formula: Average product of labor, APL =   Output Labor input And to calculate marginal product of labor (MPL) we can use the following formula: Marginal product of labor, MPL =     ? Output ?Labor input When marginal product of labor is 0, output is maximized and when MP > AP AP is increasing. We can see both MP and AP in graph 2. In table 1 we have a fixed capital of 20 and labor input from 1 to 14 where labor units are added one by one.

We can see that in this example and in graph 1 that the marginal product from added worker increases in a increasing rate up to worker number 6 and after that it increases in a decreasing rate. The fast increase of marginal product at the beginning can be caused by specialization or better use of recourses (capital). There are also many things that can cause the decrease in marginal product after worker 6, limited workspace being one of them. By looking at graph 1, showing total output of labor, we can see how the total output increases fast at the beginning and then it slows down and starts to decreases.

Graph 2 shows us how the average and marginal product of labor from the same data. The change in marginal product first rises fast and then falls fast after 6 worker. The average product of labor rises until 7. worker and it starts to decrease again. In this example the optimal input of competitors of toyota company is 6. After that the marginal production starts to decrease. Until one or two months ago it was widely accepted that with globalization and easy access to money the concept of diminishing returns was less and less important in that sense, that for at least western firms it was easy to source capital inputs.

But after the financial collapse the diminishing return concept will be come more relevant again. If we take a look at the short-run average and marginal cost of production we can see the same effect. In table 2 the output is increased by one unit each time but the marginal variable cost changes, the average total cost decreases until unit 5 and then starts to increase again. It is the same law as for the data in table 1, but there we saw the effect of increase in labor on output.