Limit product of factors of production and marginal costs: the ratio of concepts

The firm should use factors of production with observance of a certain proportion between variables and constant factors. That is, an arbitrary increase in the number of variable factors relative to constant constant will cause the end of the increase in returns. Further violation of the proportion can generally stop the return of factors of production. The so-called law of diminishing returns comes into play .

Let's consider how the return from the resource (variable factor) will change in the short-term period when part of the factors of production remains unchanged, since in the short term the firm is not capable of changing the scale of production, acquiring new equipment, building workshops.

Suppose that a given firm uses only one variable factor - labor. The return from labor is the productivity of the workers. As the existing equipment is gradually downloaded, the output will increase rapidly, then, until the workers are satisfied enough to fully load the equipment, the increment will slow down. In the event that the firm will continue 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 the output will be reduced.

The ultimate product is an increase in output due to an increase in the variable factor of production per unit. In the example that we examined, the limiting product of labor will be the increase in output by employing one additional worker in the workshop. If you look at the schedule of changes in output with an increase in the number of workers, then first the production growth will go very quickly, then it will start to slow down. Finally, with the continued growth in the number of workers, the increase will be negative.

However, in the first place in its activity the firm is faced not with a physical quantity of factors, but with their monetary expression. The marginal product of the factor of production in the monetary form is the increase in the general level of income through the use of an additional unit of the factor of production involved. At the same time, the number of all other factors of production remains constant. For each resource, the marginal product in monetary form is calculated as the product of marginal revenue at a specific level of production and the physical volume of the marginal product.

That is, the employer will be interested not in the number of workers, but in the change in wages. How will marginal costs be adjusted for an additional unit of output?

The increase in costs associated with the production of another unit of output, that is, the ratio of the total increment of variable costs to the increase in output, is called variable costs. Thus, the concepts of "marginal product" and "variable costs" are quite similar.

With increasing production volumes , costs can vary:

1. Evenly, that is, the marginal cost is a constant.
2. With the acceleration, when the output increases marginal costs.
3. With a slowdown, when the company's costs are reduced with an increase in output.

As a result, we can conclude that the marginal product and marginal costs are decisive when deciding whether to raise an additional unit of the resource. That is, the firm will be unprofitable to attract, for example, the ninth and tenth workers. Since the ninth worker will no longer provide an increase in output, and the tenth will start to hinder all others. If the goal is to further increase output, it is necessary to increase other factors of production, for example, to purchase equipment.