Question

Explain why the marginal product of labor diminishes in the short run (as more units of labor are added to a fixed amount of a fixed factor like capital or land). Why does diminishing marginal product of labor (the variable factor) lead to increasing marginal cost of the product?

Answer 1

this can be answered by a very simple example, consider a construction site where there are 10 workers and 10 hammers, now the number of hammers are fixed and suppose I keep on increasing the number of workers on that construction site. Suppose, now, there are 20 workers and 10 farmers, that means for every hammer there are 2 workers or for every worker there is 1/2 of a hammer that his productivity will decrease since he won't have any capital to work with, this situation will be worse if I increase the no. of farmers to, say, 30. This are the marginal product of labour diminishes in the short run.

Now in another example, suppose a single product required 1 worker and 1 unit of capital to be produced, now if i add 1 more worker there, the total wage spent on the production of that product is higher than required since only 1 worker was sufficient but now 2 are working (remember there is still 1 unit of capital), therefore this wage expenditure is refelected in the price and the price of the product increases. Therefore as the Marginal product of labour decreases the price of the product increases.