Economics

Why is it that, in the short-term, after a certain number of workers have been hired, output increases by less and less with each additional worker hired' Managers must make decisions that affect the company. Their decisions are based on the levels of activities of the company such as new hires. A manager must weight the marginal benefit against the marginal cost of their decision. The objective of the manager might be to maximize profits or to minimize costs. When a decision is made, constraints must be taken into account. If a manager wanted to increase profits by increasing the number of products produced, there might be a limitation in the number that can be physically produced. If a manager wanted to go ahead and increase the number of units produced, he might hire more workers or add a new machine. If a manager were to add new hires, what would be the costs associated with that decision' One cost might be the actual salary paid. Will the added salary be compensated by the increase in profits' Let’s assume that minimum wage would equate to $24,000 per year. If an increase in production would yield less than that, then the decision to increase production by adding another hire would be ill advised. Additional production or changes in the total cost can also have an impact in the decision making process that a manager must go into. Constraints can vary widely and cause differing impacts on the company’s objective. The cost of adding a new machine to accommodate a new hire can be a constraint. If a secretarial company wanted to add a new secretary, then a computer with keyboard or old fashioned typewriter would be needed. This would be an added cost to the new higher ; on top of the obvious space limitations that can affect the number of hires too. If there was only room enough for two workers at an assembly line, then adding a third might cause distractions and actually decrease the capacity of the entire line. Let’s say that a custom computer shop builds computers by hand as soon as job orders are placed. A type of constraint is the number of custom computer job orders placed. Like the example above, if we were to add a new hire and job orders decreased, so would the revenue. However the cost would go up by the amount of the new higher such as the earlier stated $24,000. Another possibility is that the turnaround time for the custom computers might just decrease, thus increasing job orders. To reach the best economic value in a company, a manager must take into account the positive or negative outcome with their decision. Marginal analysis forms the foundation of theories for profit maximization, productivity, input choice, and consumer behavior. Managers using marginal analysis will weigh the marginal cost with the marginal benefit to the decision they want to make. Let’s assume that company “XYZ” can produce 300 units of product “T” per day, but has a reserve capacity of another 200 units. Let’s further assume that the total potential of 500 units requires 10 workers and the company currently has 8 workers. If a manager were to hire the two additional workers, the output of 500 units might not be desirable. What if the total daily sales of units of “T” were 300' The ability to produce more would cause other costs. Where would the surplus be stored' What would be the storage costs' A manager must taken these questions into account, but not stop there. Finding the optimal level of activity to maximize profits or minimize costs takes much dedication. To find the marginal benefit, we take the total benefit and divide it by the change in activity. Then to find the marginal cost we take the change in total cost and divide it by the change in activity. Using these variables, we can plot both the marginal benefits with the marginal cost as we adjust or make activity changes. As we plot both on a chart, we interpret the slope and intersection. If the slop were a straight line, then we look at the direction of the line. Does it start high and travel downward' That would indicate that as activity increased, there was a decrease in either cost or benefit. An upward slop would be similar in that as activity increased, so did cost or benefit. So how do we put these together' This is where the “intersect” comes in. We find the point where both the marginal benefit and marginal cost meet or intersect. This gives us the optimal level of cost vs. benefit. Unfortunately in most applications the slope will not be linear, but curved. Never the less, the point at which the two lines intersect will be the optimal level of cost vs. benefit.