Question

Devra Gartenstein, a restaurant owner, made the following observation about preparing food: "Cooks become increasingly less productive as a kitchen becomes increasingly crowded." a. What do economists call the problem she is describing? What are its implications for the marginal product of labor for cooks? b. Do restaurant owners have a solution to this problem in the long run? Briefly explain.

Short answer

a. The situation Devra described is known as 'the law of diminishing returns'. This implies that the marginal product of labor decreases as more cooks are employed, each subsequent cook produces less additional output than the previous one. b. Yes, in the long run, restaurant owners could expand their production capacity, for instance, by enlarging the kitchen or adding more equipment. This allows them to achieve higher productivity even with more cooks.

Step-by-step solution

- Identifying the problem

Devra Gartenstein describes a situation that is known in economics as 'the Law of Diminishing Returns'. This law states that as more of a variable factor of production (in this case, cooks) is added, while keeping other factors (like the size of the kitchen) constant, there will be a point where each additional unit will become less productive.

- Implications for the marginal product of labor

The marginal product of labor is the amount of additional output that is generated when one additional unit of labor is added, assuming all other inputs stay the same. According to the law of diminishing returns, the marginal product of labor decreases as more labor (cooks in this situation) is added. This means that each additional cook generates less additional output.

- Long term solution

In the long run, restaurant owners can solve this problem by expanding their production capacity like increasing the size of the kitchen, adding more equipment, or redesigning the kitchen layout to increase efficiency. With an expanded production capacity, they can continue to add labor (cooks) and increase productivity without facing diminished returns as quickly.

Key concepts

Marginal Product of Labor

The marginal product of labor is a crucial concept in the understanding of how businesses operate effectively. It refers to the additional output generated by hiring one more employee, assuming all other factors remain unchanged. To illustrate, consider a restaurant kitchen: When a new cook is added to the staff, the amount of food that can be prepared during a shift should ideally increase. However, if the kitchen is already fully staffed, adding another cook might not result in a proportional increase in food output. The marginal product of labor in such overcrowded conditions starts to fall.
This drop is mainly due to reasons such as limited workspace, the need for cooperation among more workers, or simply because the kitchen has reached its maximum efficient capacity for the number of cooks. As a result, after a certain point, each new cook contributes less and less to the total output – an insight that can help restaurant owners and managers make informed staffing decisions.

Variable Factor of Production

A variable factor of production is any input that can be adjusted in the short term to increase or decrease production. In the context of a restaurant, labor—specifically the number of cooks—is often a variable factor. At times of high demand, the restaurant may bring in more staff to handle the increased workload. On slow days, they might reduce staff to cut costs.
Understanding how to manipulate these variable factors is key to optimizing economic efficiency. However, as Devra Gartenstein observed in her kitchen, there can be too much of a good thing. Adding more cooks beyond a certain point can lead to inefficiencies and actually hinder productivity due to the Law of Diminishing Returns, which highlights the importance of finding the optimum level of variable inputs.

Production Capacity

Understanding the production capacity of a business, such as a restaurant, is important in order to maximize efficiency and profit. Production capacity refers to the maximum output a business can produce in a given time period with the available resources. This capacity can be limited by factors like kitchen size, the number of available stoves or ovens, or even the layout of the cooking area.
When a restaurant tries to operate beyond its production capacity, the service quality and speed can suffer. Yet, expanding the physical space, investing in better equipment, or optimizing the layout of the kitchen can enhance the kitchen's capacity. This, in turn, enables more cooks to work productively, which can lead to serving more customers and increasing revenue.

Economic Efficiency

Finally, the goal of any business venture is to achieve economic efficiency. This denotes a condition where the maximum output is derived from the minimum input without wasting resources. In the case of our example kitchen, economic efficiency would mean utilizing each cook to their fullest potential without overstaffing, which would drain resources and reduce overall efficiency.
To stay economically efficient, restaurant owners must constantly balance productivity with costs. This involves not only managing the number of staff in a shift but also considering long-term investments to expand production capacity. An economically efficient kitchen operates smoothly, with each staff member's efforts directly contributing to the operation's success without any redundancy or wasted effort.