Micro Econ Question

Dear all, I am just reading SS4, LOS17.c mentioning about TC, MC, TVC, TFC, ATC, AVC, AFC…I don’t understand clearly the way Schweser book explained about the MC curve. It is explained that “MC declines initially, then increases. At low output quantities, effecciencies are realized from the specialization of labor. However, as more and more labor is added, marginal cost increases. This is due to diminishing returns, which means that at some point, each added workers contributes less to total output than the previously added worker” Why does each added workers contributes less to total output than the previously added worker? I feel the conclusion in the book is not persuasive when it explained base on a clear intention example. You are appreciated to make clear my above confusion. Thank you so much for your help.

Ok let me try to explain… Say for example if this was a burger chain, if there was one worker to put together a burger he will need to do the 3 tasks of heating the bun, cooking the patty and putting the burger together. He will be ok at his job but never 100% efficient(constantly switching between tasks will lower his productivity). If you had 3 people each doing the 3 separate tasks, they will all become better at it because they can specialize. If at this time, you added a 4th worker, he would not have a task to do other than clean up after the 3, his marginal value is much less than the first 3 worker. Thus the point of lowest marginal cost is when you have 3 workers. To be able to output more burgers than 3 workers, you can either add a forth worker or another production line. Adding a 4th worker, as I have shown, does not increase output significantly and thus MC is up. Adding another production line still keeps marginal cost the same but double output. 1 worker: output 10 burgers an hour 2 workers: 22 burgers an hour 3 workers 36 burgers an hour *an extra worker increases productivity by 14 burgers* 4 workers: 40 burgers an hour *note to increase output by 4 burgers we have to add 1 full worker*

“each added workers contributes less to total output than the previously added worker” I believe it is because we are assuming that things like factories and machineries are fixed. So even if you have more workers, you are not going to add to output as much as when your labour is low.

tsttse explained it very good. Look at the graph and put below the graph from productivity. They match the wholl idea. So in the begining the first production factor (let’s say labor is added) is very productive so the marginal cost is very low MC=(TC1-TC0)/(Q1-Q0), because Q1-Q0 is very high. But as you see in the law of diminishing returns, as you add more and more from a factor, the output continues to increase, but with a decreasing rate. So the Q1-Q0 won’t be so high and the (TC1-TC0) will rise much faster so the MC will rise.

Thu Thuy Wrote: ------------------------------------------------------- > Dear all, > > I am just reading SS4, LOS17.c mentioning about > TC, MC, TVC, TFC, ATC, AVC, AFC…I don’t > understand clearly the way Schweser book explained > about the MC curve. It is explained that “MC > declines initially, then increases. At low output > quantities, effecciencies are realized from the > specialization of labor. However, as more and more > labor is added, marginal cost increases. This is > due to diminishing returns, which means that at > some point, each added workers contributes less to > total output than the previously added worker” > > Why does each added workers contributes less to > total output than the previously added worker? I > feel the conclusion in the book is not persuasive > when it explained base on a clear intention > example. > > You are appreciated to make clear my above > confusion. > > Thank you so much for your help. Hi everybody, Thank you so much for yr explain. Everything seems to be clear right now :). I understand yr point and clear my confusion already. You just explained the upward slope of MC by putting the fourth worker in production lines while there is no extra investment of production line. As your idea flow, i also understand the reason for the downward slope of MC though you didn’t mention it. It is the reason of using source effectively in the short-term.

Sorry for trouble you all with one more question about this section. I don’t understand why the maximum MP point in the graph of product curve is higher than the maximum AP point. Can you explain me why? Thanks a lot!

Here is what I understand: When in a factory the AP0=5 units/labor force and they hire a new worker that has the MP=9 units/labor force. Then the AP1 > AP0, and the new AP1=(5+9)/2=7 units/labor. Then let’s suppose that they hire a new worker that has the MP=10 units/labor force so the AP2=(7+10)/2=8.5 units/labor. In this phase they can’t find workers that are so productive so they hire a worker that has the MP=8.5. In this case the new worker’s MP=AP2 and the AP2 is in it’s highest. The new worker highered after this will have a MP=7.5 so the AP will decrease. I don’t think I answered very precise your question, but from what I understand MP is added to the AP and divided so when MP>AP then AP rises and when MP

Neagu, As your example of calculation: AP2 should be equal to (AP0+MP1+MP2)/3 = (5+9+10)/3 = 8 not 8.5. Maybe you get a little mistake but i think your understand is logic and i understand your way of explaining. Thank you so much!