Marginal Product Formula

Introduction

Marginal product formula helps businesses predict the demand and thereby produce just enough products according to market demand. Businesses are concerned with the market demand and want to keep production in sync with the market demand. The marginal product formula helps them to take production decisions wisely. Knowing the marginal product helps businesses keep production at a high while costs at a low level.

What is the Marginal Product Formula?

The marginal product formula determines what happens to overall production when one factor of production is changed. These factors may be anything that is directly related to production, such as land, capital, labor, machinery, and so on. When any one of these factors goes up, production increases too. The businesses measure the production increase in costs and revenue to ensure that the added expense is adding value to its goods and services or operations.

How to Calculate Marginal Product?

The marginal product can be calculated in six simple steps which are the following −

The marginal product formula is expressed as −

$$\mathrm{=\:(Q^{n}\:−\:Q^{n}\:−\:1)(L^{n}\:−\:L^{n}\:−\:1)}$$

Where,

Q^n is the current total production in a given time.

Q^n−1 is the previous production value in a given time, which is prior to the marginal change.

L^n is the total production units, either machines or professionals at the time n.

L^n−1 is the total production units at the time n-1 or the previous production time.

Identify Q^n

One needs to find out the value of Q^n before using the marginal product formula. This usually includes determining the number of products produced within a specific period of time. This time period may span time as small as one hour to as much as one year. Depending on the length of the period of time used to calculate the production, the value of products may change. The size of the business and the cycle of production affect Q^n.

Example − Suppose an ice cream manufacturer produces 10,000 cones of ice cream in a day. The company hires additional employees which increases production to 12,000 cones. The value of Q^n will be 12,000.

Identify Q^n-1

After identification of Q^n, identifying Q^n−a is important. Q^n−1 implies the previous output of the organization. It is important for firms because it can show whether the organization is progressing or the firm is incurring losses due to an increase in the volume of production. A negative effect will be detrimental while a positive one will be beneficial for the firm.

Example − For the above-mentioned ice cream manufacturer, the value of Q^n−1 is 10,000 units. It is obvious and can be told before using the equation that the company has made a progress in production volume from 10,000 to 12,000.

Find the value of L^n

The value of L^n gives the current number of production units or the number of human resources of the firm. For some organizations that are small, this may be single individuals while for large organizations, this may include groups of professionals or teams to identify the L^n.

Example − The ice cream manufacturer, suppose, has increased the manpower from 3 to 5. Then the value of L^n is 5, the current number of employees of the organization

Find the value of L^n−1

L^n−1 gives the previous number of employees or production units of the organization. It is easy to see if the value of L^n−1 increases or decreases within a specific period of time for an organization. It is important because many organizations check whether the production of the firm increases with additional inputs of production units or the human count.

Example − For the ice cream manufacturer the value of L^n−1 is 3 which is its previous employee count.

Calculation of Marginal Product

In order to get the value of the marginal product, the values of Q^n, L^n, etc. can be directly substituted in the formula. This will help determine the value of marginal product more accurately.

Example − for the ice cream manufacture.

The value of marginal product

$$\mathrm{=\:(Q^{n}\:−\:Q^{n}\:−\:1)(L^{n}\:−\:L^{n}\:−\:1)}$$

$$\mathrm{=\:(12000\:− 10000)(5\:−3)}$$

$$\mathrm{=\:4000}$$

This shows that the ice cream manufacturer adds good value to its business by hiring two additional employees because its production has increased by 4,000 units.

Factoring Affecting Marginal Product Output

There are several factors that influence the marginal product output. For example, in the example of the ice cream manufacturer above, an increase in employee count has resulted in an increase in the production output.

Similarly, adding more capital or funding for the business may also increase the production output of a business. Other factors that help in the increase of production output are land and machinery.

A company may buy more space to increase its production when the demand from the market is high. So, market demand is also a factor in production output. In a similar fashion, an increase in the number of machinery also helps to improve the marginal product output.

How to Improve Marginal Product Output?

The best way to improve the marginal product output is by increasing one factor with a little additional resource. If investments in all resources, such as land, machinery, labor, etc. are done at once, it will be hard to understand which factor influenced the increase in the output the most. Therefore, the factors must be checked one by one to understand which of these increases the output the best.

It is also useful to realize that too much or extreme input of a production factor may not be ideal for checking the improvement of marginal product output. For example, if one adds too many employees to the organization, the wages may consume a lot of expense, making one spend more on wages than what they earn as revenue. That is why adding a little production factor is important to improve the marginal product output.

Conclusion

The marginal product output is important for business organizations because it helps businesses understand the value of additional inputs in terms of output generated by production. When exercised wisely, this can improve production revenues while diminishing production costs. That is why it is so important for businesses to keep an eye on marginal product formula.

FAQs

Qns 1. What does the marginal product formula determine?

Ans. The marginal product formula determines what happens to overall production when one factor of production is changed. These factors may be anything that is directly related to production, such as land, labor, capital, machinery, etc.

Qns 2. What is the marginal product formula?

Ans. The marginal product formula is expressed as:

$$\mathrm{Marginal\:cost=\:(Q^{n}\:−\:Q^{n}\:−\:1)(L^{n}\:−\:L^{n}\:−\:1)}$$

Where,

Q^n is the current total production in a given time.

Q^n−1 is the previous production value in a given time, which is previous to the marginal change.

L^n is the total production units, either machines or professionals at the time n.

L^n−1 is the total production units at the time n−1 or the previous production

Qns 3. Why do businesses measure the production increase via the marginal cost formula?

Ans. The businesses measure the production increase in costs and revenue to ensure that the added expense is adding value to its goods and services or operations.