Question

What is meant by the “marginal product of labor”? What typically happens to a firm’s marginal product of labor as it increases labor employment, all else equal? Why is that? What typically happens to a firm’s marginal product of labor as it increases capital employment, all else equal? Why is that?

Answer 1

The marginal product of labor is the change in the labor productivity if other variables used in production are kept constant.

The marginal product of labor is a change in productivity of labor proportionate to other variable employed in production when other variables are kept constant. The labor productivity in a firm decreases after a point if they go on employing labor with other variables constant.

If the firm employs more capital the productivity of the labor increases if other things are equal Because new capital can create more resources and the firm can increase other variables too.

Let's take an example of a Cake making factory. Initially, the firm has two labors and 2 big machines to make cakes. If the firm hires two more labors the output will increase because there is enough space in the firm to employ to more people who will help the other two in production of cakes but if the firm hires 1 more labor after the two it will create some confusions like on which machine should the new employee work and whom should he help. So the production will increase but not as much as it increased when the firm hired the first two employees.

Now if the firm hires 4 more employees the place will be cramped effecting the movement of people because the machines are only two, then the output will be decreased or will remain same as it was when the in the beginning. The firm will need capital expenditure i.e. more machine to improve the production.