Why is it that, in the short-term, after a certain number of workers have been hired, output increases by less and less with each additional worker hired?
Managers must make decisions that affect the company. Their decisions are based on the levels of activities of the company such as new hires. A manager must weight the marginal benefit against the marginal cost of their decision. The objective of the manager might be to maximize profits or to minimize costs. When a decision is made, constraints must be taken into account. If a manager wanted to increase profits by increasing the number of products produced, there might be a limitation in the number that can be physically produced. If a manager wanted to go ahead and increase the number of units produced, he might hire more workers or add a new machine.
If a manager were to add new hires, what would be the costs associated with that decision? One cost might be the actual salary paid. Will the added salary be compensated by the increase in profits? Let’s assume that minimum wage would equate to $24,000 per year. If an increase in production would yield less than that, then the decision to increase production by adding another hire would be ill advised. Additional production or changes in the total cost can also have an impact in the decision making process that a manager must go into.
Constraints can vary widely and cause differing impacts on the company’s objective. The cost of adding a new machine to accommodate a new hire can be a constraint. If a secretarial company wanted to add a new secretary, then a computer with keyboard or old fashioned typewriter would be needed. This would be an added cost to the new higher ; on top of the obvious space limitations that can affect the number of hires too. If there was only room enough for two workers at an assembly line, then adding a third might cause distractions and actually decrease the capacity of the entire line.   Let’s say that a custom computer shop builds...