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Unformatted text preview: u understood the law
law of diminishing
of diminishing marginal utility back in
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?
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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- Winter '14