Chapter Summary

We have seen that the concept of marginal productivity and the law of diminishing marginal productivity play central parts in both the efficient allocation of resources in general and in profit maximization in the John Bates Clark model of the business firm.

The John Bates Clark model and the principle of diminishing marginal productivity provide a good start on a theory of the firm and of supply. In applying the marginal approach and the equimarginal principle to profit maximization, it extends our understanding of the principles of efficient resource allocation. Some key points in the discussion have been

the distinction between marginal productivity and average productivity
the "law of diminishing marginal productivity"
the rule for division of a resource between two units producing the same product: equal marginal productivities
the diagnostic formula VMP=wage, that tells us the input and output are adjusted to maximize profits in the business firm, in the short run
In the long run, there may be increasing, decreasing, or constant returns to scale. Increasing returns to scale will complicate things somewhat for the marginal productivity approach.

This has given us a start on the theory of the business firm. But we will want to reinterpret the model of the firm in terms of cost -- since the cost structure of the firm is important in itself, and important for an understanding of supply.

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