Profitability Ratios

And finance Allah shmoop what are marginal product and diminishing

returns All right people when you're running a business you

invest in your inputs everything from large fixed costs like

that robot assembly unit there to labor with human beings

and or dogs In return for your inputs you get

output But how do you know if it's worth it

or not Adm Or of a given input finding the

marginal product of an input can help you answer this

excellent question Well the marginal product of an input whether

it be physical inputs or labour is the increasing output

as a result of one additional unit of that input

Okay let's make sense of this to see what we

mean Let's take a look at Black Beard who for

having a very short pirating career is nonetheless known for

being a decent manager of his crew At first Black

Beard had a small crew because his crew was small

Their rum booty was also pretty small They couldn't battle

big ships that were holding the most gold and they

could only carry so much of it even when they

won in stolen well black Beard hired another pirate which

increased their total booty from a thousand pieces of eight

to thirteen hundred pieces of eight since the booty went

from a thousand of thirteen hundred thanks to the additional

of that new employees will The marginal product of that

new hire was three hundred pieces of eight and if

he cost less than three hundred pieces of aid right

he was a bargain At least he was positive The

results of another mate in the crew were so great

that black beard decided to hire another pirate and then

another and then another Well even though the marginal product

with each new input of labor was less than last

he kept hiring more pirates Since each new pirate was

still contributing positively to Ah hire total output well with

a bigger crew they were able to take on bigger

ships increasing their total output All other inputs like their

pirate ships stayed constant It was the same ship as

the crew's size increased Well so did the amount of

booty they were scoring and who doesn't like to score

booty But the law of diminishing returns has a way

of making it rain on everyone's parade The law of

diminishing returns pops up in many places in economics including

marginal product like right here while increasing a marginal product

like labor for instance will increase total output for awhile

Eventually additional units of that input will result in a

stagnant or decreased total output Well after Black Beard's most

recent pirate higher alluding went terribly wrong There were so

many pirates on his ship that they couldn't loot effectively

They were bumping into each other accidentally shooting each other

right in the head or worse and they were frustrated

because of it Well all of a sudden they're total

output Their booty dropped from three thousand pieces of eight

to only twenty five hundred pieces of eight Argh Yeah

that's what they said Well in Black Beard's case his

output was initially increasing as he grew his crew but

eventually decreased because of it The last pirate he hired

had a negative marginal product of five hundred pieces of

eight Since that last additional unit of labor input caused

total output to go from three thousand pieces of eight

to twenty five hundred piece of aid or something that

was just making So what's a pyre to do Well

he could get another ship and start a franchise or

a fleet Or he could let that last pirate walk

the plank and just stick with one ship and his

given number of pirates A zit is well the more

the merrier Up to a point Ask any pirate and