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Marginal Value in Economics: Definition & Theorem

Instructor: Ronda Jantz

Ronda has taught college Economics and has a master's degree in Economics.

Have you ever wondered how a new employee can add positive or negative value to an organization? In this lesson, we will learn how to interpret the meaning of marginal value in economics.

What is Marginal Value?

Have you ever wondered how much value you add to your employer? This is a common question that many ask when requesting a raise or a promotion. The value for each employee can be calculated for each employee by determining what is known as marginal value.

Marginal is a fancy word that is often used in economics to mean additional. You will notice that marginal is often attached to another word - such as marginal cost, marginal value, or marginal utility. In this lesson, we will consider only marginal value.

Marginal value looks at the increased amount of value that can be achieved by providing an additional source of output. The additional output could be a piece of equipment that is added or the added value of hiring another worker.

The Bean Patch

Let's examine marginal value a bit further by taking a trip to The Bean Patch, which is a fictitious farm in Kansas. This farm grows green beans each year and hires workers to pick the beans by hand. The bean patch starts the season by hiring one worker to plant, water, and weed the ground. As harvest nears, The Bean Patch hires five more workers to pick the beans. This is a popular way to hire employees for seasonal jobs. The following chart shows The Bean Patch's production function for picking bags of beans.

The Bean Patch Labor and Output
Labor and Output

Now, let's move into the value of the worker. If we think about the term marginal value, what we are really searching for is the additional value of a worker to The Bean Patch. After all, if we are the owners of The Bean Patch, we want the workers to earn their pay.

Let's examine a chart to help us understand this further.

The Bean Patch Marginal Value
Marginal Value

This chart shows us the number of workers and the total output, which is the bags of beans picked. The final column shows the marginal value. To calculate this marginal value, take the output for one employee and subtract the output for zero employees. In this case, it would be 20-0=20. Continue to do so to fill in the marginal value for the entire chart.

This chart shows that the marginal value, or additional value, goes up when The Bean Patch hires a second worker. Each additional worker hired by The Bean Patch after the second worker causes production to increase by a smaller amount than did the hiring of the previous worker. If we continued to add more workers, we would eventually notice that the marginal value becomes negative.

Law of Diminishing Marginal Returns

Why would the marginal value go down? Well, this is because of the economic term law of diminishing marginal returns. The law of diminishing marginal returns states that as we add more inputs (in this case, employees) then we will eventually cause the marginal value to decrease. Over time, there is less work for each employee to do. The Bean Patch would notice that some employees are having trouble finding ripe beans. Additionally, The Bean Patch could get overly crowded if they hired too many employees and the employees might struggle to find a place to work.

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