it states that if we another resource in fixed add

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Unformatted text preview: u understood the law law of diminishing of diminishing marginal utility back in marginal returns Chapter 4, you shouldn’t have too much A law that states that if trouble understanding the law of diminishadditional units of one resource are added to ing marginal returns.) It states that if we another resource in fixed add additional units of a resource (such as supply, eventually the labor) to another resource (such as capital) additional output will that is in fixed supply, eventually the addidecrease. Who Benefits? Increased globalization will place some U.S. companies in a more competitive market setting. A study for the Institute for International Economics found that, between 1979 and 1999, some American workers lost jobs because they worked for U.S. companies that produced goods that couldn’t compete in price with foreign-produced imported goods. Many of these workers found other jobs, but 55 percent of those who found new jobs did so at lower pay, and 25 percent took pay cuts of 30 percent or more. Is increased globalization more likely to benefit a larger percentage of U.S. consumers or a larger percentage of U.S. workers? ECONOMIC THINKING 180 Chapter 7 Business Operations tional output produced (as a result of hiring an additional worker) will decrease. The best way to illustrate the law is with numbers. Take a look at Exhibit 7-6. Reading across the first row, we see that with zero workers, no output occurs. Now when one worker is added, the quantity of output (shown in the second column) is 5 units. The third column shows the additional output produced as a result of hiring an additional worker. If output is zero with no workers and 5 units with one worker, we conclude that hiring an additional (the first) worker increased output by 5 units. When a second worker is added, the quantity of output (shown in column 2) increases to 11 units. How much did output increase as a result of an additional (the second) worker? The answer is 6 units, as shown in column 3. If a third worker is added, output rises to 18 units, and the additional output produced as a result of the hiring of an additional (the third) worker is 7 units, as shown in column 3. Before we go on, notice what has been happening in column 3: the numbers have been increasing, from 0 to 5, then 6, then 7. Notice that when a fourth worker is added, output increases to 23 units; the additional output produced is 5 units, which is less than the output produced as a result of adding the third worker. What we are observing here is the law of diminishing marginal returns, which states that eventually the additional output produced (as a result of hiring an additional worker) will decrease. We added another worker (the fourth worker) here, and the additional output (shown in column 3) decreased from 7 to 5 units. In short, diminishing marginal returns set in with the addition of the fourth worker. Now what does the law of diminishing marginal returns have to do with hiring employees? The answer is everything, once we turn the factors i...
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