ShmoopTube

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and finance Allah shmoop What are marginal product of capital

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and marginal product of labor You know those silly economists

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always thinking on the margin and about inputs and outputs

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if you're not in the know while thinking on the

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margin means thinking about an additional unit of something like

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inputs sometimes called factors are the things firms used Teo

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make stuff to sell An output is thie ending product

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that goes to the consumer market called product by firms

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The marginal product of capital asks how much more product

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the output would we have if we added one more

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unit of capital to the production process Well the marginal

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product of labour is the same except while we switch

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the input of capital with the input of labor the

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marginal product of labour asks How much more output would

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we have if we added one more unit of Labour

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into the system Well with both of these were not

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looking at total output but rather how much more we

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get if we tinker around with our inputs of it

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So let's take a look at man's best friend to

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see how marginal product of capital in marginal product of

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labour interact And no we don't mean dogs We're talking

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about the one in your pocket Yes your phone In

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a cellphone factory you've gotten assembly line with embryonic phones

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making their way through the production process On that assembly

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line there's a mix of humans and robots each specialized

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in an area of phone production A firm has the

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goal of increasing profits which means reducing costs as much

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as possible and increasing revenues as much as possible So

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sure having the assembly line helps But what mix of

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robots and humans will cost the least or have the

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least expense Well that's where the least cost rule comes

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into play and least cost Rule says that to minimise

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costs you find the amount of marginal product that a

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dollar spent on each input type makes and then you

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set them equal to each other at the phone Jess

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Station Factory Well that means the firm can figure out

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how many workers to hire and how many machines to

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rent to minimise costs So let's take a look The

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firm's handy dandy marginal product chart If we look at

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the marginal product of laborers and the marginal product of

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machines Well we can see each additional one of them

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yields less and less marginal output That's the law of

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diminishing marginal returns rearing its ugly head If laborers cost

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ten bucks an hour and machines can be rented for

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eight bucks an hour then we can calculate the marginal

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product a price ratio for each quiz time How many

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workers and how many robots will the firm hire Well

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remember firms can get the most bang for their buck

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by employing the quantity of inputs where their marginal product

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to price ratio equals each other depending on how much

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money the firm has Well it has a few different

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options The phone firm could hire one worker into machines

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each which have a marginal product to price ratio up

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Six Let's think about what that means for a minute

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The first worker hired would result in a marginal product

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of sixty sixty units still adding sixty more phones to

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total output But at what cost Ten bucks Six additional

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phones per dollar Well the first machine is adding sixty

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four more phones to total output for eight bucks which

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means eight more phones per dollar Eight more phones for

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dollars better than six phones for dollar right So we

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hire a second robot A second robot will only bring

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in an additional forty eight phones and it still cost

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eight bucks to rent So for the second phone assembling

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robot that's forty eight divided by eight dollars That's six

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additional phones per dollar spent who Wait a minute here

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That's the same marginal product to price ratio As the

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first human you might be thinking Why not just hire

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all robots Well because hiring the first worker is a

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better deal than hiring the third robot Hiring the first

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worker gets you six phones per dollar and the third

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robot gets you only four phones per dollar which is

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why the least cost rule here works If your MP

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over peas are unequal it means you're missing out on

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a more cost effective input combo if the phone firm

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has more money while it could hire where MP Over

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P is for which means to workers and three machines

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and could also higher where MP p o ver p

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equals two which means three workers in four machines firms

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have to know their marginal product of capital in marginal

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product of labour so they can tinker with the numbers

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finding the least cost way to produce their product because

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otherwise some other firm will be finding a lower cost

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way to make the product they could then use that

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advantage toe undercut competitors pushing them out of the market

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It's kind of like Survivor but with firms everybody's gotta

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stay neck and neck to keep their skin in the

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game or else you know they'LL get voted off the

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island So if you're a firm tinker away with marginal

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product and hopefully you'LL never hear the words of the 00:04:33.597 --> [endTime] tribe has spoken What

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