Productivity Level: Understanding Production Rate and Its Measurement
Unleashing the Power Behind Each Worker: The Marginal Product in Action
What's it: The marginal product is the output that's produced when a company adds one more unit of input, often workers, while keeping other inputs constant. It's also known as the marginal return or marginal productivity.
Mastering the Math: Calculating Marginal Product
To figure out the marginal product, divide the difference in the total output by the change in the quantity of the selected input. In this case, you pick one input variable as the denominator, such as labor or capital. Here's the formula for the marginal product:
Marginal Product = Change in Output / Change in Quantity of Input
For example, suppose a company increases production from 1 million units to 1.2 million units due to a rise in demand. To achieve this growth, the company boosts its workforce from 1,000 workers to 1,500 workers. From these numbers, the marginal product of labor is 400, calculated as (1,200,000 - 1,000,000) / (1,500 - 1,000).
Marginal Product Tales: When More Input Leads to More Output
Increasing marginal product, where the marginal product is positive and continues to climb, arises when the extra input adds to the output. Take our previous table example, where the company has positive and increasing returns until it hires the third worker. In this situation, the surge in output outpaces the expansion of input, indicating that the added worker generates a larger output than the previous one.
When More Input Means Less Output
Decreasing marginal product happens when the marginal product is positive but declines over time. This situation shows that each additional input unit generates a less substantial output than the previous one. This trend often occurs as the optimal workforce size is surpassed, and employees begin to crowd or negatively impact each other's productivity.
Optimization: Finding the Sweet Spot
Zero marginal product is when adding input does not yield additional output, indicating the ideal workforce size. Before encountering this point, the company can continue boosting output by adding more inputs. However, beyond this point, increasing input results in reduced output due to inefficiencies and mismanagement.
Negative Marginal Product: When More is Less
Once the zero marginal product is exceeded, adding an input reduces total output. In our example, when the company hires the 11th worker, total output actually drops by 5 units. Uncoordinated work and inefficient use of resources can cause this contraction in output.
Marginal Product's Dance with Marginal Cost
The marginal cost and marginal product have a negative relationship. As the marginal product escalates, the marginal cost falls because producers benefit from economies of scale. Conversely, when the marginal product declines, marginal cost rises due to unproductive expenditures and diseconomies of scale.
Marginal Product's Role in Economic Decision-Making
The marginal product is crucial for measuring company productivity and gauging production efficiency. Companies can determine whether more employees will increase revenue or whether their current workforce is suboptimal. They might even replace total output with total revenue as the numerator in their calculations.
Moreover, marginal returns play a significant role in macroeconomics studies, such as explaining the economic production function to predict long-term aggregate supply (or potential GDP).
Beyond the Basics: Differences Between Returns and Marginal Returns
While return to scale describes how the output changes as all inputs change, marginal return shows the impact on output when one input alters, keeping other inputs constant. A company may experience increasing returns to scale while still facing declining marginal returns as each input exceeds its optimal level.
Learn More
- Total Product Curve
- The Law of Diminishing Marginal Returns
- The Production Function
- Economies of Scale
- Economies of Scope
- Fixed Costs
- Diseconomies of Scale
- Total Variable Cost
- Abnormal Profit
- In the realm of finance and business, understanding marginal product can be beneficial for investing in productive ventures, as it helps identify the optimal workforce size that maximizes output.
- As investors, it's essential to take into account the marginal product's role in economic decision-making when assessing the profitability of a business, as it indicates the point where additional input no longer contributes to increased output, potentially leading to decreased profits.
