Understanding Economic Equilibrium

CHAPTER 25

Wages: Minimum and More

Ice cream cones and the economic theory on wages are a lot alike. The first ice cream cone you eat tastes great, the second, good but not as good as the first, and the third not as good as either of the first two—and you might be inclined to stop eating ice cream for a while.

At the root of economic thinking about wages is the theory of diminishing marginal returns: as a firm adds workers, each worker will add value to the output of the firm, but less value than the previous one. Returns in terms of output diminish with each additional worker. At the pin factory, two or three people making pins are more productive than one, but once you get to the fourth or fifth worker you get more pins but not as many per ...