The Marginal Productivity Theory of Income
The marginal productivity theory of income was devised to explain the relationship between the demand for labor and the supply of other inputs to a process of production. It works from the assumption that other inputs are fixed at least in a short run. In other words, a widget-producing firm has a fixed amount of land and a certain stock of machinery. Given those constants, the theory inquires into how many workers the firm will want to hire.
Other People Are Reading
-
Marginal Product
-
As a set term in mainstream economic theory, marginal productivity is the change in the output of a production process that results from a specific increase in one of the inputs. For example, suppose one worker at a given machine over a period of eight hours produces 20 widgets. Suppose then that he agrees to work an extra hour. Over the course of his nine-hour day he produces 21 widgets. The marginal productivity of a man-hour in this situation is one widget.
Diminishing Returns
-
As a general rule, as more of a variable resource is added to a production process, while other resources (notably the number and quality of the widget-making machines) remain fixed, there will come a point at which marginal returns steadily decline. This is the law of diminishing (marginal) returns, or productivity.
Indeed, at some point in the addition of new inputs the marginal return becomes negative -- in other words, the total return declines. This can happen if, for example, so many workers are hired to work the same machines that they get into each others' way.
According to William A. McEachern, in "Microeconomics: A Contemporary Introduction," "The law of diminishing marginal returns is the most important feature of production in the short run."
-
Marginal Productivity and Wages
-
The marginal productivity theory of wages is a specific application to the labor market of the law of diminishing returns. It states that in a competitive environment, and in the absence of regulatory restraints, the rate employers are willing to pay for any hour of labor will be determined by the contribution that one more such hour will make to their output. It is not only the newly hired laborer who is paid this rate based on his marginal compensation. That tends to become the rate for all employees doing the same work.
Supply Curve
-
In contemporary expositions of economics the custom is to present the supply and demand for labor as a pair of curves on a graph. In this context, the marginal productivity theory amounts to the statement that MP creates the demand curve for labor. The website HR Executive, in a paper for students, explains that "with a very large number of workers and with less significant personal differences" between one worker and another, "the supply curve will be highly flexible" and at the limit will be a horizontal line.
-
