Big Squeeze - Various Profits and Costs in Business
The law of diminishing marginal productivity states that as more of an input is used while the other input is fixed, productivity first increases, remains constant and then diminishes given that technology is constant. In this case, it is true to point out that fewer laborers are being used after layoffs due. The capital is fixed and it is therefore expected that the output will eventually fall. However, this is not the case since the output has been seen to increase regardless of the laid off workers. The input labor cannot be said to have reduced in this case first because it can be seen that the laborers are now spending more hours at work. In addition, part time workers are being employed. Therefore it is not possible to identify whether labor supply has increased, reduced or has remained constant. This is therefore not a case of diminishing marginal productivity considering that technology is not constant and it is not possible to point out the direction of change in labor supply even though output has increased.
In the case, the use of less labor affects the marginal utility of the workers to some extent. Workers gain utility by consuming their income and leisure. In the case, workers gain more income and spend more of their time working hence their time for leisure reduces. Therefore as less and less workers remain in the working environment, their marginal utility of consuming goods using their income reduces and the marginal utility of consuming an extra hour of leisure increases. This is because with more income due to the overtime pay, the workers will be not willing to work since they have enough to spend. They will be willing to forgo the income and seek leisure to increase their utility.
The case is not distinguishing between short run and long run profits. This is a case of short run whereby during the boom, the firms are making supernormal profits. The case only considers that the profits may fall in future during recession. The case does not consider that this situation is likely to attract more investors in the market who will compete for the workers they are currently laying off. This situation can reduce the profits of the firm since the new firms are likely to compete for the customers that are likely to reduce the sales of existing firms hence their profits. Therefore since the case does not consider entry of new firms in the market in the long run hence the firms end up making only normal profits, it can be argued that the case does not consider long run profits. It only considers short run profits.
The case is also not considering long run costs. It only considers short run costs whereby it is able to exploit the workers. The case assume that this situation of underpaying workers will exist which is not the case since in the long run, entry of new firms will lead to competition for the workers available up to the point whereby the firms will be paying wages equal to the marginal product of labor. The case therefore only considers short run costs whereby it incurs low costs since it pays workers lower wages that is less than the marginal product of their work.
If I were an employee in sector, I would dedicate most of my time working to earn extra pay so that I can save enough just in case I am laid off during recession. I would also ensure that I seek the best paying employee to enable me earn the maximum possible during the time when the economy is doing well.
References.
Hirschey, M. (2009). Fundamentals of managerial economics. Mason, OH: South-Western/Cengage Learning.
Hirschey, M. (2009). Managerial economics. Mason, OH: South-Western Cengage Learning.
