Introduction

What one can also calculate from the data is the average product of labour, which gives one an indication of the productivity of labour.

Total, marginal and average product

Variable input
labour		 Total product (TP) Marginal product (MP) Average product (AP)
0 0 --- ---
1 500 500 500
2 1 500 1000 750
3 3 000 1500 1 000
4 4 000 1000 1 000
5 4 500 500 900
6 4 750 250 792
7 4 750 0 679
8 4 500 -250 563

Average product (AP) is equal to the total product (TP) divided by the number of workers employed.

$$\text{AP} = {\text{TP} \over \text{number of workers}}$$

For instance, for five workers, the average product is:

$$\text { }= {\text {4500} \over \text {5}}$$

$$\text { }= {\text {900}}$$

What one can also observe from the figures is that it first increases and then starts to decrease. This is because of the law of diminishing returns.

Read the following paragraph again and decide whether you understand the meaning. If not work through the example again.

The law of diminishing returns states that, as more of a variable input is used, while all the other inputs are fixed (remain the same), each additional unit of the variable input will eventually produce less and less additional output. In economics, we say that the marginal product (MP) of the variable input declines.

Activity

If you are confident that you understand the law of diminishing returns do the following activity:

Indicate whether the following statements relating to the law of diminishing returns is true or false:

The law of diminishing returns only applies if the variable input is labour.

Incorrect. The statement is false. The law of diminishing returns applies to any input. If you keep everything else constant and, say, increase the number of machines, the marginal product of the machines will eventually decrease.

Correct. The statement is indeed false. False The law of diminishing returns applies to any input. If you keep everything else constant and, say, increase the number of machines, the marginal product of the machines will eventually decrease.

If all inputs change, the law of diminishing returns does not apply.

Correct. The statement is indeed true. The law of diminishing returns only applies to the short run, and the short run is defined as the period in which all the inputs are fixed except one.

Incorrect. The statement is true. The law of diminishing returns only applies to the short run, and the short run is defined as the period in which all the inputs are fixed except one.

Consider the following scenario:

You have a plot of land on which you are going to grow carrots. You have a spade, which is your capital good, a certain amount of seeds and water, your intermediate inputs and yourself, the entrepreneur. Your variable input is the amount of fertiliser you are going to use. Let’s assume that if you do not use any fertiliser, your harvest (total product) is 10 kg. By adding the first kg of fertiliser, your harvest (total product) increases to 20 kg. By adding a the adding kg of fertiliser, your total product increases to 32 kg. By adding a third kg of fertiliser, it increases to 40 kg, and by adding a fourth kg of fertiliser it increases to 46 kg.

  1. Use this information to complete the following table by calculating the marginal product of fertiliser:
    Amount of fertiliser

    (kg)

    		 Total product

    (kg)

    		 Marginal product
    0 10 ---
    1 20  
    2 32  
    3 40  
    4 46  
  2. If a fifth kg of fertiliser is added, it will increase total product by (more than, less than) 6 kg.
  3. Do you agree with the following statement?

    By adding more and more fertiliser to a fixed plot of land, the harvest will continuously increase.

    1. Agree
    2. Disagree
Click to Show Answer
  1. Amount of fertiliser

    (kg)

    		 Total product

    (kg)

    		 Marginal product
    0 10 ___
    1 20 10
    2 32 12
    3 40 8
    4 46 6
  2. It will be less than 6 kg because the law of diminishing returns is in operation.
  3. You should disagree with the statement. As more and more fertiliser is added, the law of diminishing returns will eventually cause the marginal product to become negative.