Reading

Date: 2015-10-07; view: 388.

Discussion

Working in small groups, compare and contrast average and marginal products.

1.Read text 29 using your dictionary to help with new words. Think of the suitable title of the text.

TEXT 29

As the number of units of the variable input increases, other inputs held constant, there exists a point beyond which the marginal product of the variable input declines. When the amount of the variable input is small relative to the fixed inputs, more intensive utilization of fixed inputs by variable inputs may initially increase the marginal product of the variable input as this input is increased. Nonetheless, a point is reached beyond which an increase in the use of the variable input yields progressively less additional output. Each additional unit has, on average, fewer units of the fixed inputs with which to work.

To illustrate the concept of diminishing marginal returns, consider the kitchen at Mel's Hot Dogs, a restaurant that sells hot dogs, french fries, and soft drinks. Mel's kitchen has one gas range for cooking the hot dogs, one deep-fryer for cooking french fries, and one soft drink dispenser. One cook in the kitchen can prepare 15 meals (consisting of a hot dog, fries, and soft drink) per hour. Two cooks can prepare 35 meals per hour. The marginal product of the second cook is 20 meals per hour, five more that the marginal product of the first cook. One cook possibly concentrates on making fries and soft drinks while the other cook prepares hot dogs. Adding a third cook results in 50 meals per hour being produced, so the marginal product of the third worker is 15 (=50-35) additional meals per hour.

Therefore, after the second cook, the marginal product of additional cooks begins to decline. The fourth cook, for example, can increase the total number of meals prepared to 60 meals per hour - a marginal product of just 10 additional meals. A fifth cook adds only 5 extra meals per hour, an increase to 65 meals. While the third, fourth, and fifth cooks increase the total number of meals prepared each hour, their marginal contribution is diminishing because the amount of space and equipment in the kitchen is (i,e., capital) is fixed. Mel could increase the size of the kitchen or add more cooking equipment to increase the productivity of all workers. The point at which diminishing returns set in would then possibly occur at a higher level of employment.

The marginal product of additional cook can even become negative. For example, adding a sixth cook reduces the number of meals from 65 to 60. The marginal product of the sixth cook is -5. Do not confuse negative marginal product with diminishing marginal product. Diminishing marginal product sets in with the third cook, but marginal product does not become negative until the sixth cook is hired. Obviously, the manager would not want to hire a sixth cook since output would fall. The manager would hire the third, or fourth, or fifth cook, even though marginal product is decreasing, if more than 35,50, or 60 meals must be prepared. As we will demonstrate, managers do in fact employ variable inputs beyond the point of diminishing returns but not to the point of negative marginal product.

The law of diminishing marginal product is a simple statement concerning the relation between marginal product and the rate of production that comes from observing real-world production processes. While the eventual diminishing of marginal product cannot be proved or refuted mathematically, it is worth noting that a contrary observation has never been recorded. That is why the relation is called a law.

2. Comprehension check.

Working in pairs, answer the questions.

1. What is the difference between negative marginal product and diminishing marginal product?

2. How is the relation between marginal product and rate of production called?

3. Read the text again. Find and write down a word or words in the text that mean the same as the following definitions. They are in the same order as they appear in the text.

a) not staying the same;

b) something that you put into something to make it successful;

c) something happening or existing all the time or again and again;

d) to become weaker, smaller or less good;

e) to give somebody a job;

f) a man or a woman who controls an organization or a part of organization.