What is Marginal Product?
Definition: Marginal product denotes a change in output due to an additional input of production. Commonly referred to as marginal physical product, the metric measures the number of additional units that a company can produce on the addition of one unit of production.
Conversely, the financial metric provides a relationship between inputs of production and outputs.
Marginal Product Example
A positive marginal product comes about when an increase in production inputs results in an overall increase in volume output. For this to happen, then businesses must invest more on capital, land, and labor, which are the main factors of production.
However, it is important to note that an increase in input does not always result in an increase in output. As businesses grow, there reaches a point where an addition of a unit of production results in slower rates of production. In such cases, the marginal product would start to reduce.
In some cases, an increase in input might result in a decrease in total output. If that was to happen, then a business is said to have plunged into negative marginal productivity. A car company can only continue to produce more cars if there is strong demand in the market. If there is no demand in the market and the company continues to make cars, it is likely to plunge into negative marginal product.
Marginal product is measured in physical units. A donut shop, for instance, measures the number of donuts produced while taking into consideration fluctuations in production input. Similarly, a cement company would measure the number of cubic yards of cement produced depending on changes in input, which could be in the form of labor or raw materials.
In service industries, marginal product is ascertained by measuring the number of services provided at any given day. Such services could include the number of cars washed in a car wash or individual lessons offered.
In the financial world, marginal product is simply the amount of money or wealth accrued, as firms in this sector do not engage in the production of goods and services. Similarly, marginal product is calculated by measuring the amount of wealth amassed.
Marginal Product Formula Calculation
Marginal product is calculated by first isolating various changes in a business, which can be changes in capital, labor, or raw materials. Once the isolation is completed, one must be able to track how changes in the production input are affecting the overall production process as well as output. Likewise, there are many ways to calculate the marginal product.
The marginal product of capital tracks how changes in capital, which is one of the main factors of production, affect the overall output. For that matter, the additional output comes about with the injection of new capital in a business. The metric is synonymous with startups that rely on private investments to maintain operations.
The marginal output of labor ascertains the additional output that comes about with the hiring of more people to oversee the production process. The metric is synonymous with established firms where labor costs fluctuate depending on the production level. The hiring of more personnel, for instance, can result in an increase in volume output to meet strong demand in the market.
The marginal product of raw material is the additional output that comes into being on the addition of raw materials used in the production process. Consider a farmer who purchases additional land to as a way of farming on a much bigger piece of land.
Marginal Product vs Marginal Cost
While marginal product and marginal cost are both important financial metrics for ascertaining ideal production levels, the marginal product focuses on changes in the output. Marginal cost, on the other hand, denotes the costs incurred on the production of additional units