Average Cost

The additional output produced due to increased input placed into a business is known as the marginal product. It’s also known as MPP or marginal physical product.

In practice, this could indicate the extra doughnuts made by a doughnut shop after recruiting additional staff. It could also refer to an increase in the number of strawberries collected due to a farmer planting more seeds. Alternatively, the increased revenue a bowling alley earns due to adding more lanes is also an example of a marginal product.

How is marginal product calculated?

A business must isolate a single change and track how that change affects the output to accurately evaluate marginal products. As a result, there are several methods for calculating marginal product:

• The marginal product of capital is the extra output produced by adding one unit of capital—usually cash. This statistic is frequently used to describe start-ups that rely on private capital to get their business off the ground.
• The additional output produced by hiring another worker is known as the marginal product of labour. This is more common in established enterprises, such as an automobile plant that hires a new employee.
• The additional output gained by adding another unit of land is known as the marginal product of the land. This could apply to a farmer who buys a field next to her current property or a manufacturing owner who expands the size of her operation.
• The additional production gained from increasing a unit of material supply is known as the marginal product of raw materials. Consider a rechargeable battery company that buys a large quantity of lithium or cobalt (essential materials in manufacturing the leading model of battery).

Most organisations benefit from variable input, which allows managers to alter the amount of labour, raw resources, and raw capital invested in the company. Their decision to change this input is frequently motivated by a desire to maximise the profit by balancing marginal cost with marginal product. Marginal productivity changes as production factors vary, and as a result, a company’s overall production and profit may fluctuate.

Examples of marginal product

The most prevalent unit of measurement for marginal products is physical units.

1. This means that a doughnut business counts how many doughnuts it can make. A cement manufacturer, for example, counts how many cubic yards of cement it can create.
2. Marginal product may refer to the quantity of services supplied in service industries, such as tutoring or hairstyling, such as individual lessons or haircuts.
3. In the financial sector, the term “marginal product” could simply mean “money.” Because hedge funds and venture capital firms do not provide goods or services for the broader public, their marginal product is measured in the amount of money they may accumulate for themselves.

Relation between marginal product and total product

The total product of a company is the totality of its output, whereas the marginal product is the increased production resulting from an increase in a single input. As a thumb rule:

• Increased input will result in a positive marginal product when total output is low. To put it another way, putting more money into a company’s capital, land, workforce, or a warehouse full of raw materials will almost always result in greater products.
• Growing input may result in slower rates of increased total product as a business grows. As a result, the marginal product will decline, albeit it may still be positive.
• It’s possible that a company will reach a point where increased input reduces total output. Marginal productivity goes negative at this point.

Law of diminishing result

The law of diminishing returns states that increasing a production input in the short-run (while keeping all other production factors constant) will result in a higher marginal product, but as the business scales up, each additional increase in a production input will progressively lower increases in output.

Businesses will eventually reach a point where adding more input will hurt the marginal product rather than enhance it. For example, the number of people who can purchase a car will limit a car company’s production. If they produce more automobiles than consumers, their marginal product is negative, and the company loses money.

Difference between marginal cost and marginal product

Marginal cost depicts the costs paid when extra units of a product are produced, whereas marginal product is concerned with changes in production. When physical products (such as steel nails) are manufactured, the following are the key cost factors:

• Workforce (the workers who manufacture the nails)
• Physical goods (the raw materials that are turned into nails, plus the machinery required)
• Investing in real estate (expenses involving the factory where the nails are made)
• Transportation (costs sustained for the transportation of raw goods and finished products)

A few of these expenditures remain constant regardless of the number of nails generated. Specifically, whether the plant produces a single nail or ten thousand nails, the cost of physical space is unlikely to alter. Manufacturing equipment becomes a fixed cost once purchased, despite long-term wear and tear and the additional electricity required to keep the machinery running.

Other costs will vary depending on how many product units are manufactured. If you want to create additional nails, you’ll need extra raw iron, which must be delivered to the plant. The end-product nails must also be delivered to hardware stores. If additional worker hours are necessary to produce more nails, labour prices may also rise.

Conclusion

When the marginal product rises, each unit of input contributes more to the total output than the previous one. However, there will come a moment where marginal physical product per unit will no longer increase. When scaled or computed incorrectly, the factory’s MP may decrease even while the number of chocolatiers increases, resulting in a condition known as declining marginal returns. MP can even be negative, which is referred to as negative marginal returns. Thus, marginal product is a very essential tool in business economics.