Productivity? ?After two quarters of increasing levels of production, the CEO of Canadian Fabrication & Design was upset to learn that, during this time of expansion, productivity of the newly hired sheet metal workers declined with each new worker hired. Believing that the new workers were either lazy or inefficiently supervised (or possibly both), the CEO instructed the shop foreman to “crack down” on the new workers to bring their productivity levels up. ?Explain carefully in terms of production theory why it might be that no amount of “cracking down” can increase worker productivity at CF&D. Provide an alternative to cracking down as a means of increasing the productivity of the sheet metal workers. Fully explain your alternative in terms of production theory. This scenario where adding more workers or employees results in a diminished productivity is a classic example of the principle of diminishing marginal returns to a variable input. The concept, as discussed by Thomas and Maurice on page 296 states that the law of diminishing marginal product is “the principle that as the number of units of the variable input increases other inputs held constant, a point will be reached beyond which the marginal product decreases.
For example, I work in a pastry shop and we make cakes. I typically schedule three bakery employees to make 90 cup cakes in three hours. That averages 30 cupcakes per employee in that three-hour time span. Assuming the variable being the number of employees all else remaining constant. If I add a fourth, fifth, or sixth employee I should get 30 cup cakes produced for every additional employee I add. The concept: law of diminishing marginal product, theorizes that at some point this will not be so.
When the fifth or sixth baker shows up something happens, I run out of oven space, utensils, equipment, space, etc. All the bakers can’t possibly make 30 cup cakes each at the same time and things slow down. It then starts to take longer to make more than 90 cup cakes when there are more than 3 employees. The addition of the employees begins a decline in production, output starts to diminish, with out the additions of other inputs. That is the key to changing the result: the addition of other inputs.
Thomas and Maurice (2010) discuss that this “law of diminishing marginal product is a simple statement concerning the relation between marginal product and the rate of production that comes from observing real-world production processes” (Thomas, Maurice, p. 297). They go on to explain that this is not yet to be proved or disproved mathematically, it is a contrary observation and hence the reference to being a “law” (p. 297). The firm in the scenario should consider adding production or capital contributions.
Thus properly complementing labor, supplies, equipment, and capital; productivity will be maximized and increase production, reversing the losses. Thomas, C. & Maurice, S. (2011). Managerial economics: Foundations of business analysis and strategy. (10th ed. ). New York: McGraw-Hill. Master Card? ?Master Card had a series of cute commercials that list a series of accounting items and costs leading to a priceless product. Cell phones are often advertised as being free. In economics, it is said that nothing of value is either free or priceless, everything has a price.
Take something from your experience, that is allegedly free or priceless and use the concepts of accounting costs, economic costs, explicit costs, implicit costs, opportunity costs and sunk costs to explain why it is neither priceless nor free. The clerk at the register of Harris Teeter (Grocery Store) hand the receipts to the customers and say: “You saved $X dollars by shopping at Harris Teeter today. ” That always puzzles me – because I typically spend $100 – 200 dollars. I have less money – that is totally illogical. I laugh every time. Saved. ” What a farce. Coincidentally, as I began this homework assignment, my son brought in the mail. There was a brochure: “Free Home Security System…. An $850 Value….. ” Hunting for the small print – which I barely can read it says: $99 Customer Installation charge (a sunk cost); a 36 Month agreement at $35. 99 (plus tax) is $1295. 64 + tax here of 6. 75% comes to $1302. 4 for only the monthly fee. Total thus far = $1401. 4 total economic cost. WOW is that a value? “Free” market supplied resources are going to cost me $1401. explicit cost. Continue to read more of the small print and there are fees to upgrade the window coverage, motion detector systems, control panels, battery packs, and interior sirens, additional market-supplied resources, which I hire, rented, leased or purchase. SO actually an implied value as advertised at $850 is costing me $1401. 4 for only 36 months (the installation of $99. 00 becomes a sunk cost) – then who knows what the monthly cost would be. My son says, “Wow Mom, think of all the money the dogs have saved us. (These must be my implicit cost of having a personal security force). Although I think my son learned that statement from Harris Teeter…. The dogs… sunk costs. I assume the security sales team would try to convince me of Implicit costs that are being saved by having this system. Quite frankly the explicit costs outweigh any implicit value for me. My perception of this company is that they are using the term free to be tricky and sneaky. Thomas, C. & Maurice, S. (2011). Managerial economics: Foundations of business analysis and strategy. (10th ed. ). New York: McGraw-Hill.