The firm must use factors of production in compliance with a certain proportion between variables and constant factors. That is, an arbitrary increase in the number of variable factors with respect to constant constants will cause a cessation of the increase in returns. A further imbalance can generally stop the return of production factors. The so-called law of diminishing returns comes into effect .
Consider how the return on the resource (variable factor) will change in the short term, when some of the factors of production remain unchanged, because in the short term the company is not able to change the scale of production, acquire new equipment, build workshops.
Suppose that this company uses only one variable factor - labor. The return on labor is the productivity of workers. With the gradual loading of existing equipment, first the output will rapidly increase, then, until the workers are enough for a 100% load of equipment, the growth will slow down. In the event that the company continues to hire new workers, they will not be able to add anything to the already existing volume of production. As a result, there will be so many workers at the company that they will simply interfere, and output will decrease.
The marginal product is an increase in output by increasing the variable factor of production per unit. In the example that we examined, the marginal product of labor will be an increase in output due to the hiring of one additional worker in the workshop. If you look at the graph of changes in output with an increase in the number of workers, first the production growth will go very quickly, then it will begin to slow down. Finally, with continued growth in the number of workers, growth will become negative.
However, first of all, in its activity, the company is faced not with the physical number of factors, but with their monetary value. The marginal product of the factor of production in cash is an increase in the overall level of income through the use of an additional unit of the attracted factor of production. Moreover, the number of all other factors of production remains constant. For each resource, the marginal product in monetary terms is calculated as the product of marginal revenue for a specific level of production and the physical volume of the marginal product.
That is, the employer will not be interested in the number of workers, but in a change in wages. How will marginal costs be calculated per additional unit of production?
The increase in costs associated with the production of another unit of production, that is, the ratio of the total increase in variable costs to the increase in output, is called variable costs. Thus, the concepts of “marginal product” and “variable costs” are quite similar.
With an increase in production volumes , costs may vary:
- Evenly, that is, marginal cost is a constant.
- With acceleration, when marginal costs increase with increasing output volumes.
- With a slowdown, when the costs of the company decrease with an increase in output.
As a result, we can conclude that marginal product and marginal costs are decisive in deciding whether to attract an additional unit of resource. That is, the company will be unprofitable to attract, for example, the ninth and tenth workers. Since the ninth worker will no longer provide output growth, and the tenth will begin to interfere with all others. If the goal is to further increase output, other factors of production should be increased, for example, equipment should be purchased.