Alright, now we're going to discuss the production function and see what happens as we add more and more workers into production. Let's check it out. The production function is going to relate the amount of inputs, in this case workers, to the amount of output, which is the quantity that we produce. So we're going to talk about the marginal product of labor. This term might sound technical, but we've got "marginal" here, meaning what happens when we add one more worker. I like to think of the marginal product of labor as the fruits of our labor.

Increase in output from adding one more worker, that's the marginal product of labor. We're going to use MPL. Actually, let me write that in blue so it stands out a little more, Marginal Product of Labor, MPL with a little 'l' there for labor. So, let's go ahead and calculate the marginal product of labor in this example. We've got a local pizza shop that leases two pizza ovens at a total daily cost of $100, and the pizza company is deciding how many employees to hire at a wage of $80 per day.

Let's look at what happens on this table. On the left-hand side, we have the number of pizza ovens. They told us we have two ovens. We're always going to have two ovens. We're going to add more and more workers. So, when we have zero workers, no pizzas are produced; there are just two ovens there, and nobody's making any pizzas. As we add workers, we start seeing pizzas being produced. Let's calculate our marginal product of labor. When there are zero workers, there's no production, so we can't calculate the marginal product yet.

When we add one worker, we start from zero pizzas and get up to 30 pizzas. That means by hiring one worker, we've increased our production by 30 pizzas. What happens when we hire a second worker? With one worker, we already made 30 pizzas, and by adding one more worker, we go up to 80 pizzas. The second worker thus made an extra 50 pizzas. You can imagine that maybe when there was one worker, he had to do everything. Now with two, they can split up tasks and become more productive. The third worker increases the number from 80 to 150 pizzas, making the marginal product of labor from the third worker 70 pizzas.

Let's add a fourth worker. We go from 150 to 180 pizzas. With the addition of the fourth worker, we only gain another 30 pizzas. And look at this last worker; we go from 180 to 190 pizzas. By adding one more worker, we only get 10 extra pizzas. This is because we still only have two ovens, so maybe those workers are now kind of stepping over each other. Their marginal product ends up getting smaller and smaller, leading us to the law of diminishing returns. We discuss this concept as we continue to add more and more workers to the same amount of fixed inputs. Eventually, the marginal product will decrease.

Now, when there are so many workers, they're all crammed in there and can't be as productive as if there were fewer workers. That's the law of diminishing returns. Before we finish this discussion, let's look at a graph of the production function. Here we have the quantity of workers on one axis and the total pizzas on the other. The slopes of the graph show the marginal product of labor at different points, illustrating the diminishing returns. As we keep adding workers, the graph becomes less and less steep.

So, as we add a few workers, we initially have positive returns, but eventually, it becomes worse and worse. That's going to be it for the production function. Let's pause right here, and in the next video, we'll go ahead and finish completing this table.