The document defines marginal product of labor and explains its importance for producers. The marginal product of labor is the change in output from adding one more worker. There are three forms: 1) Increasing marginal returns when adding workers increases per-worker output due to specialization. 2) Diminishing marginal returns when adding more workers decreases per-worker output as they compete for limited resources. 3) Negative marginal returns when adding more workers actually decreases total output by disrupting production. Analyzing the marginal product of labor helps producers determine the optimal workforce size.

1. Marginal Product of
Labor
What is it and why is it important?

2. Definitions
 Labor, or a labor force, is the number of workers at a
producer’s facility.
 These Laborers utilize capital resources to produce a
product.
 Without a labor force, a producer cannot produce.
 A question faced by all producers is the size of a
labor force to employ.
 Producers must determine the most efficient number of
workers to meet their production needs.
 This number is determined by analyzing the Marginal
Product of Labor.
 This is the amount of the change in production
produced by each additional worker.
 This change can take on three forms.

3. Form 1 – Increasing Marginal Returns
 When a producer decides to
higher an additional worker
and, as a result, the number
of items produced per
worker per unit of time
increases
 The producer is said to
be enjoying Increasing
Marginal Returns.
 Production has become
more efficient as each
worker specializes in a
production task and makes
effective use of the
producer’s capital resources.

4. Form 2 – Diminishing Marginal
Returns
 If a producer continues to
add workers, the total
amount of production may
continue to increase, but the
per-worker production per
unit of time will decrease.
 This is referred to as
Diminishing Marginal
Returns.
 Each worker is competing for
the use of the producer’s
capital resources.
 As these resources are
limited, efficiency
decreases as more
workers try to utilize
them.

5. Form 3 – Negative Marginal Returns
 Eventually, if a producer
hires enough additional
workers, production can
actually decrease.
 This is known as
Negative Marginal
Returns.
 This occurs when the
number of workers trying to
utilize the available capital
resources actual disrupts the
production process and
severely impacts efficiency.