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In this video lesson, you will learn how to explain the total product curve. You'll also learn how it works and why it's important in the study of economics. Taught by Professor Tomlinson, this video lesson was selected from a broader, comprehensive course, Economics. This course and others are available from Thinkwell, Inc. The full course can be found at http://www.thinkwell.com/student/product/economics. The full course covers economic thinking, markets, consumer choice, household behavior, production, costs, perfect competition, market models, resource markets, market failures, market outcomes, macroeconomics, macroeconomic measurements, economic fluctuations, unemployment, inflation, the aggregate expenditures model, banking, spending, saving, investing, aggregate demand and aggregate supply model, monetary policy, fiscal policy, productivity and growth, and international examples.
Steven Tomlinson teaches economics at the Acton School of Business in Austin, Texas. He graduated with highest honors from the University of Oklahoma and earned a Ph.D. in economics at Stanford University. Prof. Tomlinson's academic awards include the prestigious Texas Excellence Teaching Award given by the University of Texas Alumni Association and being named "Outstanding Core Faculty in the MBA Program" several times. He has developed several instructional guides and computerized educational programs for economics.
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We're here in the factory because we're talking about production possibilities. Remember, we're talking about what a single firm can do in the short run, when it's constrained by having some of its inputs fixed. The factory space is fixed. The number of conveyor belts is fixed. The tools are fixed. Maybe even our inventory of raw materials is fixed. But in the short run we can vary our output by varying the amount of labor that we hire. Let's look now, at the firm's production possibilities in the short run.
Last time, we looked at this chart, which showed what a given number of workers could produce in a week, holding constant technology and the fixed input. Now we're going to take the information that's in this chart and transform it into a graphical snapshot of the firm's production possibility, and we will call the picture that we draw the total product curve. Let's start now, by labeling the axes. Remember, you always label your axes first, or you're not drawing an economic graph, you may be making art, but nobody knows what it is.
Let's start by labeling the vertical axes. The vertical axis will measure the total amount of output that the firm produces. The horizontal axis, in this picture, will measure the total amount of labor that we are using to produce television sets. So, here we have one, two, three, four, five, six, seven, eight workers and on the vertical axis, we'll have 10, 20, 30, 40, 50 television sets. Let's now take the information from the total output chart and translate it into a curve. So, the first point on our curve would be one worker and two television sets and I'll put a red dot right here, at this point, to represent this possibility. If the firm employs one worker, in a factory of a given size, with a given quantity of tools and so forth, they will get two televisions per week.
If you add a second worker, your total output per week would then go up to ten televisions, according to the chart. The third worker increases total output to 30 televisions per week, the fourth worker adds a total of ten more televisions to give us a total output of 40 televisions per week. Notice now, we're getting combinations of quantity of workers and quantity of televisions produced per week. The fifth worker makes it possible for us to produce a total of 45 televisions per week. With a sixth worker, we can produce a total of 48 televisions per week. Seven workers means we get 49 televisions per week and eight workers puts us back down to 48 televisions per week.
These, of course, are not the only possible quantities of labor that we could hire. We could hire fractional workers. We could hire fractional workers by hiring people for only part of the day, or to only work part of the shift. If we connect these dots, we'll get a smooth relationship between the amount of labor that the firm employs and the number of televisions that are produced per week. So, let's connect the dots then and get a total product curve. Here it goes, connecting the dots and I'm going to label this curve TP because it is the total product of labor, in my television factory. Every time I add a worker, I calculate the total number of televisions that my entire crew can assemble per week, and that gives me a point on the curve.
So, one, two, three, four, five workers can produce a total of 45 televisions per week. Now, when you look at this snapshot, you'll notice a few things about the production technology, production possibilities. What do you see, in looking at this snapshot, what do you see that catches your attention? Well, let's notice a few things. The curve has an S shape and this kind of S shape is made up of three characteristics. The first thing you notice is that whenever you have small crews, adding an extra worker, that is, going from zero to one and then one to two workers, output increases at an increasing rate. That is, each additional worker adds more to total output than did the worker before. The curve is increasing, that is, the slope of the curve is increasing, the quantity of televisions produced are increasing at an increasing rate.
So, in this region down here, the curve is convex. Convex, the curve is convex. The slope is increasing. The next thing you notice is that over a range, up to here, the total number of televisions produced is increasing at a decreasing rate, as we add extra workers. That is, each additional worker adds less to total output than did the worker before. We're adding more workers, but the extra televisions that we're getting are fewer and fewer and fewer. Output is increasing at a decreasing rate. Finally, we notice that this curve has a maximum point, that there is some kind of capacity to our factory. If we hire too many workers, that is, beyond a certain point, the total quantity of televisions produced, actually begins to shrink. That is, if we go from seven workers to eight workers, the volume of televisions that we ship out the door actually begins to contract.
Now this requires some explanation. Economists usually draw the total product curve for a particular firm as having this S shape, because it represents assumptions about technologies that we believe match pretty well the reality of a lot of production processes. Certainly, production processes that involve manufacturing or making things. Let's then define a concept that will be useful to us in describing the shape of this curve and that is the concept of the marginal product of labor. The marginal product of the variable input, in this case, the marginal product of labor, is the change in total output that results from increasing the amount of variable input by one unit. It is the change in total product that results from a change in the amount of the variable input, the amount of labor that's used.
Let's calculate now the marginal product along this curve. The first worker takes our total television production from zero to two. The marginal product of the first worker then, is two television sets. That's the total amount of output that he adds by being hired. The second worker, now that we have a shift that has two workers instead of one, brings the total up to ten televisions produced. That is, the second worker is adding ten minus two or eight television to total production. The marginal product of the second worker hired is eight televisions. The third worker now brings the total up to 30, 30 minus 10 is a total additional production or an additional production of 20 units. The third worker has a marginal product of 20 televisions. If it weren't for the third worker, we'd be back with two workers and 10 televisions. So, the third worker adds 20.
The fourth worker then adds 40 minus 30, is ten. The marginal product of the fifth worker is 45 minus 40 televisions or five. So, the change in output that results from the change in labor is what we call the marginal product of labor. Remember, we're calculating this marginal product holding constant the firm's know-how and holding constant all other inputs, like the size of the factory, the number of tools, and so forth. Here's a little chart that we've made up that shows the marginal product of labor. I could have labeled it marginal product, but I decided instead to label it with the definition of marginal product, the change in total output or televisions that results from a change in the labor input.
If we do this, I can go over and lay this chart next to my other charts and we see that the first worker has a marginal product of two televisions, he adds two to total output. The second worker has a marginal product of eight, as we calculated before, and you can go right on down the chart. The third worker has a marginal product of 20, the fourth has a marginal product of ten, the fifth has a marginal product of five and you can look at the rest of the chart, which we'll now move over next door, so that you can study it. Here's what you want to notice about this firm's technology.
We can describe a firm's technology by changes in its marginal product. Back there, whenever we were looking at the shape of the curve, we were really talking about changes in the firm's marginal product of labor. Let's look at that curve again. Down here, in this region of the curve, where the curve is convex, the marginal product of labor is increasing as we add additional workers. That is, down here in this region each additional worker adds more additional output than the worker before. The first worker has a marginal product of two and then eight, and then third worker adds 20, and so forth.
Now, why does the economist believe that at small scales, down here at whenever the firm was first adding variable input that the marginal product would be increasing? Why is that? Do you have an idea? This is why. Economists believe that increasing marginal product comes from specialization and tools. Whenever you add additional workers to a production process, the workers are able to divide the tasks or divide the production process into lots of separate tasks, which they can do separately.
For example, the famous example that Adam Smith gave was the production of straight pins, pins used for pinning clothes. He said the production process involves a lot of distinct tasks, stretching the wires, putting a point on the pin with a grinder, putting a head on the pin with a different tool. And he said, "If you notice the process of producing pins can be divided up into a lot of different tasks." And when each worker can concentrate on a particular task, perhaps the task that he or she is particularly good at even, has comparative advantage in, in that case, he said, "the productivity increases remarkably." Three workers can make 50 times as many pins as a single worker working alone. That's because they can divide the job into different tasks and save on the time they would otherwise spend doing one task, getting out a new set of tools, moving to another task, getting out a new set of tools, moving to another task, the so-called setup costs.
Another thing that you want to think about when you're thinking about moving from one worker to two workers to three workers, is what we call teamwork. Teamwork is when larger groups can use a different technique of production. Think about moving furniture. You can spend all day trying to move one room of furniture, but if you can get a buddy to help you, you could do the job in less than a quarter of the amount of time. That's because two people can move furniture using different techniques than one person. One person moving furniture pretty much has to squat and push and grunt and try to move that sofa across the room, but two people can each pick up an end and move the sofa much, much more productively.
So teamwork and specialization are always tending to increase the productivity of labor. Add more workers and you have more scope for teamwork and specialization. After a certain point, however, you notice that scope for teamwork and specialization is no longer driving the story. We eventually reach a point where additional input results in output decreasing, but at a decreasing rate. This is what we call the problem of congestion.
Imagine, you're having friends over and you're making dinner in the kitchen in your apartment. What do you do? You give everybody a task. You cut up the salad, you make the sandwiches, you go over and stir the soup, and so forth. Well, everybody's got something to do, but before too long you've got so many people crowded in your kitchen that you're beginning to get in each other's way, and that reduces your productivity.
As you crowd more and more television workers into a factory of a given size, eventually they're having to share tools, they're getting in each other's way, there's too much labor for the fixed amount of capital. When you've got too much of a variable input congested into the fixed inputs, then your productivity begins to fall. The workers begin to have accidents, step on each other, get in each other's way. Output begins to increase at a decreasing rate. Finally, after this point right here, after our point of maximum output, the losses from congestion are so great that additional workers actually reduce total output. There's so much congestion that it's actually reducing total output. No firm in its right mind would ever operate over in this region of its total product curve. If you can produce as much output with fewer workers, that's going to be less expensive and more profitable.
So, as a quick summary, when you draw this S shaped total product curve, you are summarizing the assumptions that economists usually make about technology. That for a firm that has fixed inputs and alters its output by changing only one input, say labor, you usually have a region of teamwork and specialization, whereas marginal product is increasing and the curve is convex, followed by a region where marginal product is decreasing, but still positive. Output is increasing at a decreasing rate because of congestion. This is our region of diminishing marginal product. And finally, after you get past this top of the curve, marginal product becomes negative. Congestion is so strong that productivity has actually become negative. This S shaped curve represents the technology possibilities of the firm in the short run.
Next we're going to represent marginal product in its own curve and we'll show another curve that summarizes another measure of productivity.
Production and Costs
The Basics of Production
Explaining the Total Product Curve Page [3 of 3]