The alteration in output occurs solely through the adjustment of inputs, with all other factors of production, like land and capital, staying constant.
This concept holds significant relevance in examining short-term production and plays a pivotal role in comprehending supply principles. The term "marginal product" stands as a paramount term in the context of short-term production.
Marginal Product Explained
The marginal product is the increase in overall production resulting from a one-unit increase in a specific factor of production, such as capital, labor, or land, while keeping other factors constant.
Factors of production are essential components that support the entire production process, ranging from machinery to the workforce employed for manufacturing each unit of a product.
For instance, consider a bakery that produces X units of items daily. Due to increased demand and popularity, the bakery decided to add one baking apparatus and hire 10 more workers. This addition results in a daily production increase, making it X+50 units. The marginal physical product formula helps quantify this boost in production when specific inputs are augmented, all while maintaining other production factors at a constant level.
Marginal Product Formula
The marginal product formula can be mathematically expressed in several ways:
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Marginal product equals the change in output divided by the change in input.
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Or, in symbols: Marginal product = ∆TP/∆L
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Alternatively, it can be calculated as the difference between the total production at the current time (Qn) and the production at the previous time (Qn – 1), divided by the difference between the total units at the current time (Ln) and the units at the previous time (Ln – 1).
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In equations: Marginal product = [Qn – (Qn – 1)] / [Ln – (Ln – 1)]
What is Total Product?
Total Product describes the total quantity of products or services that a firm generates utilizing particular inputs during a certain time. It is the quantity of things created when labor, capital, and raw materials are joined together. Total Product is, fundamentally, a crucial economic and production analysis concept, detailing a company’s total capacity for output.
What is the Average Product?
In economics and commerce, the average product refers to the output or amount of products or services generated per unit of input. This is achieved by dividing the total product by the quantity of the input utilized in the manufacturing process.
Relation Between Marginal Product and Marginal Cost
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The total product represents a company's overall output, while the marginal physical product indicates the extra production resulting from a single input increase.
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Generally, increasing input leads to a positive marginal product when total output is low. In simpler terms, investing more in a company's capital, land, workforce, or raw materials usually leads to higher productivity.
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However, as a business expands, the growth in input might lead to slower increases in total output. Consequently, the marginal product might decrease, although it could still remain positive.
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There's a threshold where additional input negatively impacts total output, leading to a negative marginal productivity. This signifies a point where increased input reduces overall production.
Factors Affecting Marginal Product Output
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Various factors influence marginal product output, including changes in production elements.
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Capital investment, such as increased funding or the acquisition of additional land or workspace is another factor that can be modified.
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The introduction of new machinery is yet another element that can impact marginal product output.
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The ultimate goal of increasing production is to meet customer demand and boost revenue.
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Consequently, customer demand plays a crucial role in determining marginal product output.
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When there is higher demand for a product, it becomes logical for businesses to hire more workers or invest in more machinery to ramp up production.
Uses of Marginal Product
Let's learn how the calculation of marginal product benefits organizations through the following points:
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It enables companies to assess the increase in production achieved when adding one unit of a production factor.
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The definition of a single unit of a production factor can vary from one company to another. Firms aim to find the optimal number of employees (as an example of a production factor) to hire in order to maximize their revenue and output.
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Insufficient laborers can lead to reduced productivity while having an excessive number of laborers might result in higher wage expenses that outweigh the additional output. Consequently, both scenarios pose challenges for any growing business.
How to Increase Marginal Product Output
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To maximize your business's marginal product output, it's advisable to make incremental changes to individual production elements.
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Making minor adjustments one at a time is crucial; simultaneously increasing employees, warehouse space, and capital investment makes it difficult to pinpoint the most effective contributor to revenue growth.
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Extreme increases in any production element can lead to financial losses. For instance, the additional profits generated by hiring a new employee should surpass or at least match the cost of their salary.
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Hiring multiple employees simultaneously may result in excessive wage expenditure that exceeds the revenue generated, posing a financial challenge for the company.
