firm decisions - based of benefits on incremental or average basis  

• total output - can actually decrease after too many workers are employed
  • too many workers >> workers get in each others' way, entrepeneurship decreases
• average product of labor (AP_L) = Q/L
  • output per unit of labor
  • slope of line from origin to point on total product curve
• marginal product of labor (MP_L) = DQ/DL
  • derivative of the production function w/ respect to labor
  • additional output produced w/ increase in labor by 1 unit
• marginal output less than 0 >> decreasing total output
• marginal output less than average output >> decreasing average output
  • marginal output intersects average output at max average output

• graph not drawn to scale
• total output curve
• average product of labor curve
• marginal product of labor curve
• when marginal product curve crosses the x-axis (becomes negative), total output curve reaches a maximum
• at intersection of marginal product and average product, average product is at a maximum

law of diminishing marginal returns - additions from input to output gradually decrease  

• increasing input has more effect on output early on than later
• small labor force >> adding labor affects output considerably
  • more workers assigned to specialized tasks, etc
• larger labor force after adding labor >> adding additional labor doesn't affect output as much as before
  • too many workers >> less efficient, more willing to slack
• technology improvements >> shifts total output curve >> increases labor productivity as a whole
  • note however, that diminishing marginal returns still exist
  • existence of a max total ouput proves existence of diminishing marginal returns
  • increasing labor productivity >> increases capital flow >> increases standard of living