Your friend has a large garden and grows fresh fruit and vegetables to be sold a

Question

Your friend has a large garden and grows fresh fruit and vegetables to be sold at a local farmer’s market. Your friend comments, “I hired a college student who was on summer vacation to help me this summer and my production more than doubled. Next summer, I think I’ll hire two or maybe three helpers and my output should go up more than three or fourfold.”

If all production process eventually exhibit diminishing marginal product of the variable inputs, could it be true that your friend hired a helper (doubled the labor) and more than doubled his production? Why or why not? By the way, in the long run, what must your friend do to the scale of his operation if he/she wants to continue to hire workers and have those workers generate proportional increases in production? Even in the long run, could your friend expand the scale of operation forever and continue to keep average costs at a minimum?

Explanation / Answer

Universal law of diminishing returns

In the statement above there are 4 implied questions. All these questions are reasonable and stand up to common sense. Where is therefore the confusion? We shall explain.

We will break-up the issues raised into 4 different topics.

The law of diminishing returns states that in all production processes, continually adding more of a single factor of production, will at some point yield lower incremental per-unit returns. The law does not state that adding more of a factor will decrease the total production. But this could also happen.

We need to understand the nature of the Production process. We call this the production function because output is a function of the variable factors of production. There are at least 3 stages in this process. This is shown diagrammatically. (Please note that the graph is not to scale and is just a representation of the concept)

Please look at the MPP curve below, where initially the output increases more than proportionately to increase in labor. This is the stage in which your friend is currently operating. Therefore, when he employed a student in addition to his own labor, output doubled. This is because, the other factors of production become more efficient due to more labor since they were being under-utilized hitherto.   

However, your friend cannot continue hiring students to help him and expect to double his output with every new student so hired. This is because other factors of production like seeds, implements, water and so on remain constant (assumption as per the law) and therefore their efficiency declines as they reach the point of maximum efficiency. The marginal output per student starts declining at point X above which is the point where the Average output per student reaches the maximum point Y.

In the long run your friend must increase other factors of production proportionately too, thereby shifting the production function upwards as shown.                               

However, the shifting of the PF cannot go on indefinitely. PF shifting occurs when the techniques of production change. But technological change is limited by the new innovation and discoveries. In any field of human endeavor, there are limits to the finiteness of change.

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