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Average product is the total products divided by the quantity of an input. Therefore, the average product of labour is the sum of product divided by the quantity of hired labour. When average product begins to decline it indicates that the firm is making a loss. Hence, the manager should not hire more workers because the new workers will be contributing to inefficiencies hence reducing firm’s production capacity. (Pindyck, & Rubinfeld, 2013, p.171). The firm must take into account its capacity because hiring more workers will lead to capital constrains. Constraints in capital pace a ceiling on the potential output of the firm.
According to Law of Diminishing Returns, as a business utilises more of a variable input, with particular quantity of fixed input, the marginal product of the variable input finally declines (Pindyck, & Rubinfeld, 2013, p.174). When the last employee is hired in a company and the marginal products begins to decline it shows that the last employee is causing the original workers to produce less than they would otherwise do. Therefore, the employer should make immediate decision to fire the last labour inputs.
Marginal product refers to the change in the total products after an increase in one-unit in the quantity of labour employed. It explains how hiring additional workers may contribute to total product (Pindyck, & Rubinfeld, 2013, p.173). Total product is the sum of goods produced. Increase in quantity of labour increases the marginal product. However, if additional workers are hired and there is a decrease in total product (TP) it show that there is decrease in returns to sale (DRS). Therefore, the manager should cease from hiring more workers.
Increasing marginal returns in a firm occurs when the marginal product of a new employee surpasses the marginal products of the original workers (Pindyck, & Rubinfeld, 2013, p.171). However, when there is a decrease marginal returns it indicate that marginal product of a new employee is less than marginal products of the original workers. In conclusion, the manager should hire more workers when there is increasing marginal returns.
Pindyck, R., & Rubinfeld, D. (2013). Microeconomics (3rd ed.). Boston: Pearson Prentice Hall.