Productivity and Cost Term Paper

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Law of Marginal Productivity comes to Macy's

In theory, the more demand there is for a good or service, the more a producer wishes to provide this good, and that producing in bulk lowers costs. Even when consumer demand is down, a supplier can also produce more, in the hopes of defraying a decrease in price with a bulk increase in sales. However, certain costs of production are fixed. In other words, the Law of Marginal Productivity holds constant. This economic law states, namely that "when the technology of production and some of the inputs are held constant and the quantity of a variable input increases continually, the marginal productivity of the variable input will eventually decline." (King, 2004)

This law is perhaps most obviously evidenced in agriculture or conventional factory production, where even if there is an increased demand for grapes, putting more and more workers onto the field to pick more of the grapes will eventually bottom out in value -- each additional worker can only pick so many more of the desired fruits, or each worker in a factory can only work so much harder on a crowded assembly line, before the increase in wages does not pay for the increase in production and sales. Such "inputs that are held steady are called the fixed inputs." (King, 2004) The costs of maintaining the depreciating inputs of land and capital are fixed costs for fixed inputs, as are the price of worker wages and required benefits, unlike the actual number of workers involved in production, which a factory owner, for example, can alter at his or her discretion.

Another way to express the law of marginal productivity is that, as the variable input increases, the output also increases, but at a decreasing rate. The marginal productivity of labor is the rate of increase in output as the labor input increases.

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To say that output increases at a decreasing rate when the variable input increases is another way to say that the marginal productivity declines. (King, 2004)

The "Law of Marginal Productivity affects not only factory production, and agricultural production" however. This law as well, affects retail stores. Stores have many fixed costs -- not just wages, but lighting, air temperature control, and other maintenance costs -- the longer a store is open during the day, even with an increased customer level of foot traffic, the more workers the store must have. "Over the years," many department stores "have turned into clothing and beauty emporiums, but because they were trying to make the high profits that went with their high expenses - you don't see marble floors in Target - they have paid dearly. "In other words, to be a department store of a certain caliber and to justify higher prices for goods, one must also, as a fixed cost input, make the store look like a place that sells expensive goods. (Rozhon, 2005)

But the desired increased foot traffic does not always, only translate into more sales, as "it is no longer the department store" as a place to buy goods, "that's the lure," for consumers. "It's no longer even a shopping mall anymore - it's an entertainment and lifestyle mall with playhouses, community halls and restaurants." (Rozhon, 2005)

Thus, recently Federated Department stores announced that it was….....

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