Marginal Product of Labor

If a firm keeps increasing the amount of labor it uses, ceteris paribus, the total output will increase, as mentioned above. However, if the additional labor is more productive than the previous one, the total output will increase more; if not, it will increase less. Suppose that two workers can work effectively with one machine. If you employ only one worker, she can still produce some output, but because she is the only worker, she has to divide her time in between using the machine and doing other work necessary for production. So, employing another worker can increase production greatly. If the firm employs more labor, the output would still increase, but, given the single machine to work with, the higher the number of workers, the more difficult it will be for all of them to use the same machine effectively.

 Hence, as more and more labor is used, given that everything else is the same, the increase in the total output for each additional unit of labor input, i.e. marginal product, might at first increase. We will call this increasing marginal returns. However, as we continue to use more and more labor while other inputs are fixed, the marginal product will eventually become less and less. This is known as diminishing marginal returns.