Marginal Product of Capital

and finance Allah shmoop What are marginal product of capital

and marginal product of labor You know those silly economists

always thinking on the margin and about inputs and outputs

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

margin means thinking about an additional unit of something like

inputs sometimes called factors are the things firms used Teo

make stuff to sell An output is thie ending product

that goes to the consumer market called product by firms

The marginal product of capital asks how much more product

the output would we have if we added one more

unit of capital to the production process Well the marginal

product of labour is the same except while we switch

the input of capital with the input of labor the

marginal product of labour asks How much more output would

we have if we added one more unit of Labour

into the system Well with both of these were not

looking at total output but rather how much more we

get if we tinker around with our inputs of it

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

see how marginal product of capital in marginal product of

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

about the one in your pocket Yes your phone In

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

making their way through the production process On that assembly

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

in an area of phone production A firm has the

goal of increasing profits which means reducing costs as much

as possible and increasing revenues as much as possible So

sure having the assembly line helps But what mix of

robots and humans will cost the least or have the

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

into play and least cost Rule says that to minimise

costs you find the amount of marginal product that a

dollar spent on each input type makes and then you

set them equal to each other at the phone Jess

Station Factory Well that means the firm can figure out

how many workers to hire and how many machines to

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

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

the marginal product of laborers and the marginal product of

machines Well we can see each additional one of them

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

diminishing marginal returns rearing its ugly head If laborers cost

ten bucks an hour and machines can be rented for

eight bucks an hour then we can calculate the marginal

product a price ratio for each quiz time How many

workers and how many robots will the firm hire Well

remember firms can get the most bang for their buck

by employing the quantity of inputs where their marginal product

to price ratio equals each other depending on how much

money the firm has Well it has a few different

options The phone firm could hire one worker into machines

each which have a marginal product to price ratio up

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

The first worker hired would result in a marginal product

of sixty sixty units still adding sixty more phones to

total output But at what cost Ten bucks Six additional

phones per dollar Well the first machine is adding sixty

four more phones to total output for eight bucks which

means eight more phones per dollar Eight more phones for

dollars better than six phones for dollar right So we

hire a second robot A second robot will only bring

in an additional forty eight phones and it still cost

eight bucks to rent So for the second phone assembling

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

additional phones per dollar spent who Wait a minute here

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

first human you might be thinking Why not just hire

all robots Well because hiring the first worker is a

better deal than hiring the third robot Hiring the first

worker gets you six phones per dollar and the third

robot gets you only four phones per dollar which is

why the least cost rule here works If your MP

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

a more cost effective input combo if the phone firm

has more money while it could hire where MP Over

P is for which means to workers and three machines

and could also higher where MP p o ver p

equals two which means three workers in four machines firms

have to know their marginal product of capital in marginal

product of labour so they can tinker with the numbers

finding the least cost way to produce their product because

otherwise some other firm will be finding a lower cost

way to make the product they could then use that

advantage toe undercut competitors pushing them out of the market

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

stay neck and neck to keep their skin in the

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

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

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