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Econ: What are Marginal Product of Capital and Marginal Product of Labor? 2 Views


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What is Marginal Product of Capital? Marginal product of capital is how much a company can increase their production by if they add one unit of capital. This figure can be found after a company buys a new piece of machinery; the change in production resulting from adding that new piece of machinery is referred to as the marginal product of capital.

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Transcript

00:00

and finance Allah shmoop What are marginal product of capital

00:05

and marginal product of labor You know those silly economists

00:12

always thinking on the margin and about inputs and outputs

00:16

if you're not in the know while thinking on the

00:18

margin means thinking about an additional unit of something like

00:22

inputs sometimes called factors are the things firms used Teo

00:26

make stuff to sell An output is thie ending product

00:29

that goes to the consumer market called product by firms

00:33

The marginal product of capital asks how much more product

00:36

the output would we have if we added one more

00:40

unit of capital to the production process Well the marginal

00:44

product of labour is the same except while we switch

00:46

the input of capital with the input of labor the

00:49

marginal product of labour asks How much more output would

00:53

we have if we added one more unit of Labour

00:56

into the system Well with both of these were not

00:58

looking at total output but rather how much more we

01:01

get if we tinker around with our inputs of it

01:03

So let's take a look at man's best friend to

01:05

see how marginal product of capital in marginal product of

01:08

labour interact And no we don't mean dogs We're talking

01:11

about the one in your pocket Yes your phone In

01:13

a cellphone factory you've gotten assembly line with embryonic phones

01:17

making their way through the production process On that assembly

01:20

line there's a mix of humans and robots each specialized

01:23

in an area of phone production A firm has the

01:26

goal of increasing profits which means reducing costs as much

01:30

as possible and increasing revenues as much as possible So

01:33

sure having the assembly line helps But what mix of

01:37

robots and humans will cost the least or have the

01:40

least expense Well that's where the least cost rule comes

01:43

into play and least cost Rule says that to minimise

01:46

costs you find the amount of marginal product that a

01:49

dollar spent on each input type makes and then you

01:52

set them equal to each other at the phone Jess

01:55

Station Factory Well that means the firm can figure out

01:57

how many workers to hire and how many machines to

02:00

rent to minimise costs So let's take a look The

02:03

firm's handy dandy marginal product chart If we look at

02:06

the marginal product of laborers and the marginal product of

02:08

machines Well we can see each additional one of them

02:11

yields less and less marginal output That's the law of

02:14

diminishing marginal returns rearing its ugly head If laborers cost

02:19

ten bucks an hour and machines can be rented for

02:21

eight bucks an hour then we can calculate the marginal

02:24

product a price ratio for each quiz time How many

02:27

workers and how many robots will the firm hire Well

02:30

remember firms can get the most bang for their buck

02:32

by employing the quantity of inputs where their marginal product

02:36

to price ratio equals each other depending on how much

02:39

money the firm has Well it has a few different

02:41

options The phone firm could hire one worker into machines

02:44

each which have a marginal product to price ratio up

02:46

Six Let's think about what that means for a minute

02:49

The first worker hired would result in a marginal product

02:51

of sixty sixty units still adding sixty more phones to

02:54

total output But at what cost Ten bucks Six additional

02:58

phones per dollar Well the first machine is adding sixty

03:01

four more phones to total output for eight bucks which

03:04

means eight more phones per dollar Eight more phones for

03:07

dollars better than six phones for dollar right So we

03:10

hire a second robot A second robot will only bring

03:13

in an additional forty eight phones and it still cost

03:16

eight bucks to rent So for the second phone assembling

03:18

robot that's forty eight divided by eight dollars That's six

03:21

additional phones per dollar spent who Wait a minute here

03:25

That's the same marginal product to price ratio As the

03:28

first human you might be thinking Why not just hire

03:31

all robots Well because hiring the first worker is a

03:35

better deal than hiring the third robot Hiring the first

03:38

worker gets you six phones per dollar and the third

03:41

robot gets you only four phones per dollar which is

03:44

why the least cost rule here works If your MP

03:48

over peas are unequal it means you're missing out on

03:51

a more cost effective input combo if the phone firm

03:54

has more money while it could hire where MP Over

03:57

P is for which means to workers and three machines

03:59

and could also higher where MP p o ver p

04:01

equals two which means three workers in four machines firms

04:05

have to know their marginal product of capital in marginal

04:07

product of labour so they can tinker with the numbers

04:10

finding the least cost way to produce their product because

04:13

otherwise some other firm will be finding a lower cost

04:15

way to make the product they could then use that

04:17

advantage toe undercut competitors pushing them out of the market

04:21

It's kind of like Survivor but with firms everybody's gotta

04:23

stay neck and neck to keep their skin in the

04:25

game or else you know they'LL get voted off the

04:28

island So if you're a firm tinker away with marginal

04:31

product and hopefully you'LL never hear the words of the 00:04:33.597 --> [endTime] tribe has spoken What

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