The change in production output brought on by a change in a production input is known as the marginal product. All variables must be held constant when calculating the marginal product by businesses, with the exception of the rise in labor units. This means that other factors like property, plants, and equipment used in production, aside from the units of labor, remain unchanged.
Businesses can see the increase in the number of items produced per additional unit of labor by calculating the marginal product. Although each company may have a different definition of a labor unit, typically one employee counts as one labor unit. The company wants to determine how many workers it needs to hire in order to maximize production and revenue. If you have too few workers, you won’t have enough to be productive. If you have too many employees, your expenses will exceed your income. Both are a problem for any growing business.
The marginal product formula is the difference between the quantity of goods produced (Q) and the addition of one unit of labor (L) (Q divided by L). Due to the fact that the formula is based on each additional unit of labor, the denominator in this equation is always one. By deducting the previous quantity of items produced from the current quantity of items produced, businesses can just as easily determine the marginal product.
A hat maker discovers he can make five hats per day. He discovers that his shop can produce a total of eight hats per day after hiring an employee. The change in labor units is one. Three more times were produced (8 – 5 = 3) as a result. This is the numerator of the equation. The denominator is one. The marginal product in this example is 3/1 = 3.
A company’s labor costs increase with each new hire, or so-called marginal costs. The business is growing its marginal product at the same time. Through a process known as marginal revenue productivity, this results in an increase in revenue. The business stops hiring new hires when marginal costs and marginal revenue productivity are equal. After this point, if the business hires more people, its marginal product and revenue will decline while its operating expenses will rise. Economists refer to this as the law of diminishing returns.
Total product, marginal product and average product | APⓇ Microeconomics | Khan Academy
How to calculate marginal product
The following are the key steps for calculating marginal product:
Review the marginal product formula
1. Review the marginal product formula
The marginal product is calculated using the formula (Qn – Qn-1) / (Ln – Ln-1).
2. Identify Q^n
The current total production time is n, and Qn is the total production time at time n.
For instance, Pizza Prince employs two people and can produce 15 pizzas per hour. The company hires one more employee. Pizza output increases to 22 pizzas an hour. Qn is equal to 22, or the current rate of pizza production per hour.
3. Identify Q^n-1
The total production time at n-1 is n-1, and Qn – 1 is the total production time at n-1.
For Pizza Prince, the Qn-1 is 15, which represents the previous rate of pizzas produced per hour.
4. Identify L^n
L^n is the total units at time n.
Example: The Ln for Pizza Prince is 3, or the number of employees as of right now.
5. Identify L^n-1
L^n – 1 is the total units at time n-1.
Example: In the case of Pizza Prince, Ln-1 is 2, or the number of previous employees.
6. Calculate marginal product
Put the correct numbers in the formula (Qn – Qn-1) / (Ln – Ln-1) using the appropriate numbers.
Example: The marginal product equation for Pizza Prince is (22 – 15) / (3 – 2). Pizza Prince’s marginal product increases by seven pizzas when there are three employees instead of two.
7. Calculate marginal product (simplified)
L^n – L^n – 1 is often equal to 1. There is a much easier formula you can use to calculate marginal product in these circumstances. Subtract the previous output volume or level from the current output level.
Example: At Pizza Prince, the previous production rate with two workers was 15 pizzas per hour. Currently, 22 pizzas are produced per hour by three workers. 22 – 15 = 7. Step six’s marginal product is where we end up.
What is marginal product?
A formula called marginal product is used to assess how a change in one production factor affects overall production. The variable in question could be labor, money, land, equipment, or any other element that directly affects the manufacture of goods. Typically, when one of these factors is raised, production rises as well. To ensure that the additional expense adds value, businesses must compare the increase in production to revenues and costs.
How to improve marginal product output
It is best to make small adjustments to one aspect of production at a time to ensure that your company is getting the highest possible marginal product output. If you simultaneously increase the number of workers, the amount of warehouse space you buy, and the amount of money you spend on merchandise, it will be difficult to determine which of these factors had the greatest revenue-boosting effects.
Additionally, boosting a production component to an extreme can lead to a financial loss. For example, the increased profits from hiring another employee must exceed or be equal to the cost of hiring the new employee. When many new employees are hired at once, the company might end up paying more in wages than it does in revenue.
What affects marginal product output?
Several factors impact marginal product output. First, there is an increased production element. The increased production factor in the Pizza Prince example above was labor. However, any production component can be altered and the resulting marginal product measured. Another variable in production that can be moved is capital, or an increase in funding. Some businesses purchase more land or workspace. Machinery is another factor that can affect marginal product output.
By increasing production, the company hopes to satisfy consumer demand and eventually boost sales. Thus, customer demand affects marginal product output. If there is a higher demand for the product, it makes sense for businesses to increase their workforce or equipment purchases to produce goods.
What is the law of diminishing returns?
According to the law of diminishing returns, increasing production inputs will eventually stop producing more marginal goods. There are limits within a workplace that inhibit exponential production. Every business has a perfect level, or a point at which its output generates the greatest profits at the lowest costs. Beyond that point, increasing production factors will result in higher labor costs and decreased product revenue.
Examples of marginal product
Here are a few more examples of calculating marginal product:
Example 1: In order to meet customer demand during the holiday season, Toys Toys Toys has hired a number of new personnel. 10 employees can make 20 toys a day. 11 employees can make 24 toys a day. 12 employees can make 25 toys a day. 13 employees can make 25 toys a day. What is the marginal product, and how many employees should Toys Toys Toys have?
With 11 employees, the marginal product is 4, with 12 employees, it is 1, and with 13 employees, it is 0. For Toys Toys Toys, 12 employees is the ideal number. Above 12, production does not increase.
Example 2: Shoe Emporium has expanded its production line by one machine. Previously, Shoe Emporium could produce 200 pairs of shoes per day using three machines. The fourth machine will allow Shoe Emporium to produce 280 pairs of shoes per day. What is the marginal product output?.
The marginal product output for Shoe Emporium is 80.
Example 3: To accommodate their dairy cows, Dairy Dudes have purchased an additional acre of land. Before, Dairy Dudes had 10 acres of land. Each week, their cows produced 120 gallons of milk. Now, they are collecting 130 gallons of milk a week. What is the marginal product output?.
The marginal product output for Dairy Dudes is 10.
How do you calculate marginal product in microeconomics?
The change in the overall number of units produced divided by the change in a single variable input is the formula for marginal product.
What is marginal product with example?
An excellent illustration of the marginal product of labor is a restaurant kitchen. 1. With no cooks, the restaurant’s production will be 0. 2. The restaurant may produce 10 meals more after hiring one cook, resulting in a positive MPL of 10.