COST OF PRODUCTION (LABOR), Part III
In the table below, you will be filling in certain boxes for the Marginal Product and the Total Product of labor.  The Marginal Product is the additional product produced by each worker that is hired.  The Total Product of the next worker hired is figured by adding the Marginal Product of the additional worker to the previous Total Product.
On the table below, take your mouse and move it slowly down the TP, MP, and AP columns.  You will see the TP, MP and AP show up on the graph, and you will see where each of the following begins and ends:  Increasing Marginal Returns, Diminishing Marginal Returns, and Decreasing Marginal Returns. 
Notice on the table you just filled in above, as you hire workers 1 - 3, the Marginal Product continues to rise, but beyond the 3rd worker, the Marginal Product rises, but at a decreasing rate until the 6th worker.  Beyond the 6th worker the Marginal Product becomes negative and the Total Product goes down. 

On the graph below, you see the correct TP and MP answers on the table you just completed, but now you see a graph of the TP and MP.  Take your mouse and scroll down the arrows to see TP and MP appear on the graph.  You can see that TP and MP rise at first (Increasing Marginal Returns), then rise at a decreasing rate (Diminishing Marginal Returns), and then fall (Decreasing Marginal Returns). 
Looking at the graph above:

Increasing Marginal Returns starts at the 1st worker and goes to the 4th worker.  You should notice three things:  1.  The Marginal Product is the greatest upon hiring the 4th worker.  2.  At the 4th worker, this is where the Average Product is at its highest point.  3.  Upon hiring the 5th worker, theMarginal Product touches the Average Product at its highest point.

Diminishing Marginal Returns occurs when you add more and more of a variable input (workers) to a fixed input (a machine), the additional product (MP) begins to go down.  Diminishing Marginal Returns sets in AFTER the 4th worker and lasts until the 7th worker.  Between these groups of workers, you can see that Total Product is still rising, but is rising at a decreasing rate, thus the term Diminishing Marginal Returns.  IMPORTANT:  All hiring decisions should take place within the range of Diminishing Marginal Returns.  You will see later in this lesson that the decision of exactly how many workers should be hired is based upon the price paid for the product and the wage rate paid to each worker.

Decreasing Marginal Returns sets in BEYOND the 7th worker.  For each worker hired beyond the 7th worker, the Marginal Product becomes negative which causes the Total Product to go down.  In this situation, you should NEVER hire beyond the 7th worker.  If you do, though, you should be prepared to either lay off or fire this worker once you find your Total Product going down.
In the interactive lesson below, you will keep clicking on the arrow in the lower righthand corner to learn about a PERFECTLY COMPETITIVE product and labor market.  As you continue reading the lesson, you will learn about an IMPERFECT product market (the price is lowered to increase the quantity sold) and a PERFECTLY COMPETITIVE labor market where the wage rate stays the same for each worker hired.  NOTE:  The wage rate in this lesson is also known as the Marginal Factor Cost (MFC) or Marginal Resource Cost (MRC).  This means the additional cost of hiring each worker is equal to the addtional cost of labor (Factor or Resource) so this is why the MFC or MRC is equal to the wage rate.
In the interactive activity below you will fill in information for both a PERFECTLY COMPETITIVE product and labor market where the price of the product (price of $5) and the price of labor (wage rate of $10) remain unchanged as output increases, and a IMPERFECTLY COMPETITIVE product market (price goes lower to increase output) and a PERFECTLY COMPETITIVE labor market where the price of labor (wage rate of $10) remains unchanged.

Click on the arrow on the interactive activity below, fill in the boxes in the table, click on the arrow again, and see what the graph of each table looks like for both a PERFECTLY COMPETITIVE product and labor market and an IMPERFECTLY COMPETITIVE product market and a PERFECTLY COMPETITIVE labor market.