Production Theory

Discussion on the abstract for “Diminishing Marginal Returns and the Production of Education: An International Analysis,” by Douglas N. Harris (Education Economics, 2007).

Summary

Douglas N. Harris’s article describes how there are diminishing marginal returns (DMR) with respect to school inputs, such as class size and teacher education level, for production of education in developing nations and for minority students in developed nations. Although popular literature and previous research findings claim that there is no DMR with respect to school inputs and education results and few tests looking for DMR appear invalid, Harris thinks differently. A new test was performed with 36 different countries for data, and as commonly found in popular literature the marginal effects of school inputs are frequently negative, predicting no DMR. But there were cases with positive marginal effects, offering signs of DMR. Harris also discusses a reinterpretation of the Heyneman-Loxley hypothesis about school input effects, which has helped international governments and aid agencies with educational investments.

 Commentary

Diminishing marginal returns is an economic law that claims that the marginal output of a production process decreases as the amount of a single factor of production is increased, holding the other factors of production constant. In other words, it claims that adding one more factor of production, holding all others constant, will lower returns at some point in time. Pertaining to our article, this would mean that marginal education results decrease as the amount of school inputs is increased.

While there will be a difference between the marginal returns to school inputs in developed vs. developing countries, we believe there would still be DMR in both types of countries. We believe the difference in marginal returns would result because of the current amount of technology in developed countries.

More specifically, we believe that since developed countries have ready access to technology and are more likely to have updated, thorough textbooks, increasing inputs would in turn increase their education results, but not by very much. There is only so much an updated textbook can achieve with respect to education levels. Likewise, teachers with higher education levels in developed countries are likely to boost education results because of their experience in their field of study, but not so much comparatively to undeveloped countries.

Contrarily, the developing countries are not as likely to have access to current technology, thus their education levels will not be as strong as the developed countries. Moreover, developing countries are not as likely to have updated and current textbooks, so that could hinder their education results as well. But, any increase in resource in developing countries would significantly increase the educational results more than in developed countries. The developing countries are able to utilize the extra resource more than the developed countries because of their lack of prior resources.

This is where the difference in marginal returns exists. More specifically, if an extra computer were added to Notre Dame’s campus, the educational results would not be significant. Yet if a computer were given to an undeveloped country, the educational results would be significantly increased. The developed countries can be seen as the “overcrowded” factories, when one more factor of production is added (educational input), the marginal output begins to decrease (education levels). Contrastingly, the undeveloped countries can be seen as a factory that does not have many workers, so adding one more worker (educational input) will increase their output (education levels) even more.

 Real-World Application

Diminishing marginal returns is a potential problem in every form of production, from manufacturing to farming. Managers must make decisions concerning the types and amounts of inputs involved in the process, in order to optimize the final output. At Stryker, a manufacturing company involved in the production of medical equipment, a manager would have to decide how many factory workers to hire to make each piece of equipment. For example, starting with 20 workers the company can produce 200 machines in a day. By hiring an additional worker, the daily production would increase to 210 machines. However, due to space constraints, when hiring another worker the company’s production would only increase by 8, to 218. When additional workers are hired, the increase in total production continues to grow smaller due to diminishing marginal returns.

A similar example can be found in farming, where crop yields are carefully monitored. Crop yields can be affected by many different variables, such as moisture, minerals, and sunlight, and plants must compete for the resources. Due to the competition, planting more seeds does not necessarily lead to an increase in production.  As shown in the graph below, while planting more seeds increases the net yield initially, the flattening of the slope of the graph clearly illustrates the effects of diminishing marginal returns.

  Graph

Posted by Matt, Chris and Allison (Section 1)

Resources:

http://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp#axzz1nXHsIJjA

http://en.wikipedia.org/wiki/Diminishing_returns#cite_note-1

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