06 Apr What is Marginal Product?
Posted at 22:27h in 0 Comments
Marginal product refers to the additional output that is obtained by adding one unit of input. The output could be in the form of a product manufactured in a factory or a service provided by a business. The extra input could be in the form of another worker.
The marginal product concept is a key factor that every business has to take into consideration. It is equally applicable to those who manufacture a product or to firms that provide various services.
What does marginal product mean?
Consider a situation where a certain factory produces 1,000 units of output every day. It employs 10 workers for this purpose. The firm is able to sell every unit that it produces.
Over a period of time, the demand for the product increases. Now the factory needs to step up production. It adds one more employee and consequently, its output rises to 1,080 units. The additional 80 units comprise the marginal product.
The decision to increase the number of workers can be considered to be sound as long as the rise in productivity is greater than the extra wages that need to be paid.
Remember that the marginal product can be negative as well. The following example will explain how that is possible.
Leighton Inc. runs a medium-sized manufacturing facility that makes ovens and toasters for retail buyers. It produces 150 units on each working day. When demand increases, it considers adding more workers to increase production.
Example of marginal product
But the company quickly realizes that increasing its employee strength will not help. That’s because the machinery and equipment that it utilizes in the manufacturing process are already working at full capacity. In fact, adding more workers would probably lead to a lower level of output, as the equipment would need to be switched off and then restarted again to accommodate the additional workers.
If Leighton Inc. wants to increase production, it will need to add more workers as well as additional machinery.
Marginal product is the increase in output that results from adding one unit of a given input while holding other inputs constant. An understanding of this concept can help the management of a firm to decide on the best way to maximize production while keeping costs to a minimum.