1. The Law of Diminishing Marginal Returns and Business Costs The factory makes chairs. It has only two inputs of production: capital and labor. Labor is the number of workers. -We will assume that the workers perform INDENTICALLY well on the job. (Identical labor).

2. Capital is everything else used in production: all machines, equipment, power supplies and buildings. -We will assume that capital is fixed. We have fixed capital. (Fixed equipment) and will vary the number of workers to see what happens to output.

3. INPUTS OF THE TOTALMARGINALAVERAGE VARIABLE RESOURCE PRODUCT (# OF WORKERS) 0 0 1 10 2 25 3 45 4 60 5 70 6 75 7 8 70

4. INPUTS OF THE TOTALMARGINALAVERAGE VARIABLE RESOURECE PRODUCT (# OF WORKERS) 0 0 1 10 2 25 15 12.50 3 45 20 15.00 4 60 15 15.00 5 70 10 14.00 6 75 5 12.50 7 75 0 10.71 8 70 -5 8.75

5. Marginal Product Marginal product = change in total product associated with each additional input of a variable resource. Marginal = change in total product Product each additional input of A variable resource

6. Marginal = change in total product Product change in the variable Resource Marginal = total product Product variable resource Marginal = total product Product 1

7. Marginal Product Problem #1 INPUTS OF TOTALMARGIANLAVERAGE LABORPRODUCT 0 1 15 2 34 3 51 4 65 5 74 6 80 7 83 8 82

8. Marginal Product Problem #2 INPUTS OF TOTALMARGIANLAVERAGE LABORPRODUCT 6 120 - 20 7 147 21 8 23 9 20

9. Law of Diminishing Marginal Returns When successive equal amounts of a variable resource are combined with a fixed amount of another resource: The marginal increase in output that can be attributed to each additional unit of the variable resource will eventually decline.

10. In this example we fixed capital (all other inputs) and varied labor. The same results would apply if we fixed labor, and varied all other inputs except one type of capital.