Economics Part A

Table of Contents

The New Carpenters Production Costs

In these sets of circumtances, the factory experiences declining marginal output, as follows:

 

The second carpenter

The second carpenter’s marginal output is only a half of a single bookcase per day (it takes him two days to complete a full bookcase). The total cost of a bookcase produced by the second carpenter is therefore $230 (two days salary at $90 a day, plus $50 in raw materials).

 

The third carpenter

The third carpenter’s marginal output is only 1/3 bookcase per day (it takes him three days to complete a full bookcase). The total cost of a bookcase made by the third carpenter is therefore $320 (three days salary at $90 per day, plus $50 in raw materials).

The fourth carpenter

The fourth carpenter’s marginal output is only 1/4 bookcase per day (it takes him four days to complete a full bookcase). The total cost of a bookcase built by the fourth carpenter is therefore $410 (four days’ salary at $90 a day, plus $50 in raw materials). 

To summarize, the smaller the amount that each new employee produces per day, the higher are his production costs.  This is the meaning of Increasing Relative Costs.