Optimal Decisions and Estimation Techniques in Economics Essay

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Updated: Mar 7th, 2024

Introduction

It seems unusual in the first instance to have lesser output with an increasing number of workers but the law proves the fact that indeed in the short run each additional worker or labor would reduce the amount of output generated eventually leading to a negative outcome which may not be perfectly applicable in the work settings but it can be said that after a certain period each additional worker may result in having reduced generated revenue.

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The law is said to be a law of diminishing returns, which holds that the technology cannot be altered and hence the techniques of production remain the same, while the units of variable (labor) can be increased or decreased affecting the technology up to some extent. An increased number of units may be ineffective to the technology as it would only be able to produce a certain outcome.

Main body

Adding additional units may reduce the production as the additional units would then require using the same technology and equipment which is only effective when operated by a limited number of units. Hence it is suggesting that the equipment or capital in a manufacturing firm may be limited and the labor using the equipment or capital must also be limited as any additional labor would have to wait for its turn to operate the equipment (which can only generate a limited output) requiring more time leading to problems. The interesting fact is that the law of diminishing returns considers the fact that all the labor is equal in terms of education, performance, and capability, yet it cannot help increasing the output beyond a certain point.

It is for such reasons that the output in the short run is limited even though more labor is in use. However, things could change in the long run as a manufacturing firm may buy more equipment and capital to increase the output in which case more of the labor would naturally be needed to operate. The output would certainly increase in this case however such plans are unable to be implemented in the short run. In short, maximum output requires a certain amount of labor to work, increasing the labor means additional costs (salaries) and yet the same number of units would be produced resulting in reduced profitability.

A suitable example could be a shoe manufacturing plant with having a machine that can generate 100 pairs of shoes in an hour requiring 10 workers. However, it may still be operative if 6 workers operate it in which case it will make 75 pairs of shoes. The machine has a maximum capacity of producing 100 pairs of shoes per hour using 10 workers. The manager, unaware of the fact, hires 2 more workers due to increased demand which requires the manufacturer to make 110 pairs of shoes in an hour.

The result could be very disappointing as a machine having a capacity to make 100 pairs of shoes per hour with 10 workers to work on it at a time may not accommodate a total of 12 workers at a time and so the additional 2 workers may have to find their role, which means more costs (salaries). The output would still be 100 pairs of shoes an hour but the increased costs would reduce the profit margin.

References

Stretton, H (2000). Economics: A new introduction. Pluto Press.

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. 2008. Web.

McConnel, C.R., Brue, S.L. and Campbell, R.R. (2004). Microeconomics: Principles, Problems, and Policies. McGraw-Hill.

Thomas, C.R. & Maurice, C. (2008). Managerial Economics McGraw-Hill/Irwin.

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IvyPanda. (2024, March 7). Optimal Decisions and Estimation Techniques in Economics. https://ivypanda.com/essays/optimal-decisions-and-estimation-techniques-in-economics/

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"Optimal Decisions and Estimation Techniques in Economics." IvyPanda, 7 Mar. 2024, ivypanda.com/essays/optimal-decisions-and-estimation-techniques-in-economics/.

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IvyPanda. (2024) 'Optimal Decisions and Estimation Techniques in Economics'. 7 March.

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IvyPanda. 2024. "Optimal Decisions and Estimation Techniques in Economics." March 7, 2024. https://ivypanda.com/essays/optimal-decisions-and-estimation-techniques-in-economics/.

1. IvyPanda. "Optimal Decisions and Estimation Techniques in Economics." March 7, 2024. https://ivypanda.com/essays/optimal-decisions-and-estimation-techniques-in-economics/.


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IvyPanda. "Optimal Decisions and Estimation Techniques in Economics." March 7, 2024. https://ivypanda.com/essays/optimal-decisions-and-estimation-techniques-in-economics/.

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