The Concept of Marginal Productivity and its Application

The Concept of Marginal Productivity and its Application
Name
Institution
Marginal Productivity
The concept of marginal productivity refers to the additional or extra output that a business gains by increasing labor by one unit, for example hiring one more worker (Farrell, 2013). In simple terms, therefore, marginal productivity is the extra rewards realized when a single unit of labor is added into the production process, while all other factors of production such as capital and land remains the same.
To better explain this concept, let us consider productivity at a brick laying company. In an 8-hour shift, 4 workers make 400 blocks. The company hires one more worker, and the number of bricks made in 8 hours increases to 600. In this case, the marginal productivity of hiring an extra worker is 200 (the new output less the initial output; 600-400). So, if the company’s technology, efficiency and length of shift remain the same, marginal productivity is the extra number of bricks made by adding one unit if labor, i.e. hiring one more brick layer.
The concept of marginal productivity is applied by employers to determine employees’ wages when a new worker is added into the labor force. However, this approach could have a negative implication in terms of cost of labor if the company pays its workers a uniform salary according to the number of bricks made. Before hiring the new worker, the company pays each of the 4 workers a sum of 400 multiplied by whatever they are paid per brick, for example 4 bucks per brick, which is split equally among the 4 workers. That would come to 1600 bucks for 400 bricks, i.e. 400 bucks per worker. When a new worker is hired, productivity increases to 600 bricks. This would cost the company 3000 bucks by paying 5 workers 600 bucks each. The company would end up losing money because it now pays for 1000 bricks although only 600 were made (the new calculation assumes each worker makes 200 bricks, but it is only the new worker who increases productivity by 200 units).
To avoid this dark side of marginal productivity, the company may discriminate its pay structure by paying each worker according to the number of units they produce. Accordingly, the old workers will each get 400 bucks each while the new worker gets 800 bucks, bringing the total cost to 2400 ...