Final answer:
The concept at hand is diminishing returns, observed when additional workers are hired but result in smaller increases in output. After reaching a certain number of workers, the added production slows and eventually may decrease, highlighting the importance of finding an optimum labor level for maximum productivity.
Step-by-step explanation:
Suppose that you run a house-painting company with 2 workers painting a total of 4 houses per month. Hiring a third worker increases the output to 6 houses, a fourth worker to 9 houses, and a fifth and sixth worker to 13 and 15 houses, respectively. This scenario exemplifies the concept of diminishing returns, a principle in the field of economics. At a certain point, adding more workers results in a decreased rate of output per additional worker. Initially, hiring more workers generates a larger increase in production (Stage 1), but as more workers are hired, the increase in productivity starts slowing down (Stage 2).
When we reach Stage 3, we see negative returns; too many workers do not contribute as effectively to output as earlier hires did, possibly due to factors like limited workspace or management capacity. This phenomenon occurs because, in the short run, labor is the only variable factor a firm can adjust to influence production levels. Therefore, the optimal number of workers depends on balancing the cost of labor against the value of the output they produce.