Economics "Ask the Instructor" Clip 13 Transcript
Suppose you’re in the lawn mowing business. Why would you rather have one of those fancy zero-radius riding mowers as compared to your conventional rider mower?
In the lawn mowing business you get paid based on work performed. Right? Not on the basis of how much time spent, or how much money you may need, but on how much grass you cut. Well, this might not be the case if you’re mowing your grandmother’s lawn. But we’re talking about your own business here.
Because your earnings are based on your productivity you have an incentive to increase your productivity. And you know what we mean by productivity: work done per unit of time, say, per day.
Economists use the term Marginal Revenue Product to refer to the dollar value of your productivity. It’s your marginal physical product (how many yards you cut per hour or per day) multiplied by the price you charge.
One way you could earn more is by working longer hours. But another way would be for you to do more work per unit of time, that is, become more productive.
Think of the amount of time you would waste on your present mower. It has a turning radius of several feet, which means you spend a lot of time at the corners of the lawn. The time wasted really becomes noticeable as the unmowed area shrinks in size. As the uncut area gets smaller and smaller you begin to spend more time going over already-mowed turf as you spend more time doing that than cutting grass!
One way to increase your marginal revenue product is by getting a better piece of capital equipment. I’m talking about one of those zero-radius mowers. With this piece of equipment, much more of your time would be spent cutting grass and less time spent going over grass you’ve already cut. As a result, you get more work done per unit of time. And because you’re more productive, your earnings will increase.
Now, of course whether you choose to get a newer mower depends on a lot of other factors: the price of the mower, what you could sell your old mower for, and your expectations as to how many yards you might be mowing. It probably would not be wise for you to invest in an expensive mower if you’ll only be in the lawn mowing business for a short time.