Marginal Product Formula in Economics

What is Marginal Product?

The marginal product formula can be determined by calculating the change in the quantity produced or the change in the level of production and then dividing the same by the change in the factor of production. For most cases, the denominator is 1 as the formula that was initially formulated was based on an increment of every 1 unit in the production factor. In these situations, companies can only figure out the final output by deducting the previous quantity or level of production from the current level of production.

What is Marginal Product of Labor?

Marginal labor product is a change in output when additional labor is added, such as when an extra employee is employed. It is important to remember that all the other factors remain constant. In other words, with the marginal product of labor, just the number of labor changes, not any other factor involved in the production. For example, with our factory manager, if you want to determine the marginal product of labor, you could employ one more worker to see whether additional labor increases the number of cars you can manufacture adequately, or whether it is appropriate to hire more employees to meet your quota.

Marginal Product Formula

Marginal Product can be identified as an increase in the total production of a factor of production (capital, labour, property, etc.) resulting from an increase of one unit in the factor of production, while other factors of production remain constant. The formula Marginal Product (MP) is shown below:

Marginal Product = (Qn – Qn-1) / (Ln – Ln-1)

  • Q: the Total Production at time n
  • Qn-1 : the Total Production at time n-1
  • L: the Units at time n
  • Ln-1 : the Units at time n-1

Uses of Marginal Product Formula

Calculation of the marginal product allows businesses to see an increase in the number of products produced per unit of labor added. The definition of a single unit of labor can vary by company, but usually, one employee is a single unit of labor. The goal of the company is to determine the number of employees it must hire in order to achieve maximum production and maximum revenue. Too few employees mean you ‘re not going to have enough to be productive. So many employees mean you’re going to spend more than you bring in. They ‘re both a concern for any that company.

How to calculate Marginal Product of labor Example

ABC Company is in the business of washing the cars for their customers. ABC Company wants to hire more labors to grow its business. Following are the details of the output and number of labors:

MP

Therefore, the calculation of marginal product:

  • When 2 labors are hired: Marginal Product= (20-10)/(2-1)= 9
  • When 3 labors are hired: Marginal Product= (28-20)/(3-2)= 8

Marginal Costs & Revenue

As each new employee is hired, the company incurs increased labor costs, called marginal costs. At the same time, the company is increasing its marginal product. This results in an improvement in revenue called marginal revenue productivity. When marginal costs and marginal productivity of sales are equal, the company avoids hiring new employees. When the company continues to hire employees after this point, its marginal product and revenue decline as the costs of daily operations increase. Economists refer to this as the law of diminishing returns.

See Also
Net Profit Margin Formula
The Meaning of Interest Rate