Marginal Product: How It Impacts Business Output & Profits

In the complex world of manufacturing, it is important to understand how different inputs result in different outputs to increase production efficiency and profitability. Marginal product is a basic concept that helps businesses go through challenges. Whether a business wants to add an extra worker or use additional raw materials, understanding the marginal product helps them to qualify the additional output provided by each new or added unit of the input. 

This blog will dive deep into the marginal product, its calculation, significance, and its relationship with other financial and economic situations.

Defining Marginal Product and Its Role

Marginal product (MP) means additional products that are produced by employing or inputting one unit more of one specific unit while keeping the other inputs constant. It can also be understood as the change in total production because of adding an extra worker, machine, or any other resource, item, or unit.

For example, if there is a factory that produces pens and the owner hires one more worker, the total output will increase from 1000 to 1100. So, the marginal product here with the additional worker is 100 pens. This ratio information of the marginal product is important for businesses to make sure that how many additional workers or inputs can affect their productivity and help businesses have maximum profit.

Sellers need to understand the different factors of production that contribute to a wholesome output. It also helps companies identify the increase in production after adding a unit of labour. The main role of the marginal product is to use a sufficient workforce or units to generate maximum productivity and maximum revenue.

Calculating Marginal Product: Step-by-Step Guide

Calculating the marginal product is a simple process. Here is a step-by-step guide that can help you calculate the marginal product:

• Step 1: Identify the change in the inputs

Identify the change, like an increase or decrease in the input variable by machine, worker, or any other resource or input.

• Step 2: Measure the old output

Make sure to measure and record the total output that is coming before changing any inputs. It is important to compare the results after changing any variable.

• Step 3: Measure the new output

After changing any variable or input, measure the new total output.

• Step 4: Change in output

Calculate the change in outputs by subtracting the old output from the new output to find out the total change in the output.

• Step 5: Compute the marginal product-

Calculate the marginal product by dividing the change in the total output by the change in the inputs. 

Marginal Product Examples

Marginal products are mostly measured in physical units. some of the examples of them are:

Retail industry: Consider a retail company making a profit of Rs. 40,000 daily with the help of 10 staff members. A retail company is now planning to hire two extra staff members to improve their customer service and sales during their heavy season. By adding two staff members, the company notes an increase in sales of Rs. 48,000. The marginal product here will be:

• Initial output (before hiring new staff): Rs. 40,000
• New output: Rs. 48,000
• Change in output: new output – old output = 48,000 – 40,000 = Rs. 8,000
• Change in input: 2 staff members
• The marginal product can be calculated by dividing the change in output by the change in input.

Marginal product = change in output/change in input = 8000/2 = Rs. 4,000 per staff member.

Agriculture industry: Imagine a farmer has 1 acre of land and needs 10 units of fertilizer to produce around 200 kg of wheat. When a farmer adds one more unit of fertilizer, the wheat production is increased to 220 kg. So, the marginal product here will be:

• Initial yield: 200 kg
• New yield: 220 kg
• Change in yield (output): 220-200 = 20 kg
• Change in fertilizer (input): 1 unit

Marginal product = change in output/change in input = 20/1 = 20 kg per fertilizer’s unit.

Manufacturing industry: Imagine that a factory produces smartphones and has 20 workers. It manufactures 260 smartphones each day. The company has now added an extra worker, which results in 273 smartphone production. The marginal product here will be:

• Initial output: 260 smartphones
• New output: 273 smartphones
• Change in output: 273-260 = 15 smartphones
• Change in input: 1 worker

Marginal product = change in output/change in input = 15/1 = 13 smartphones per worker.

Technology industry: Consider that a software development team of 10 developers makes 100 lines of code per hour. If the company hires one more developer, then the output will increase to 110 lines of code per hour. The marginal product will be:

• Initial output: 100 lines of code
• New output: 110 lines of code.
• Change in output: 110–100 lines of code = 10 lines of code
• Change in developers (input): 1 developer

Marginal product = change in output/change in input = 10/1 = 10 lines of code per developer.

Significance of Marginal Product

Here are some of the key points that highlight the significance of the marginal product:

1. Production efficiency: Marginal product identifies the point at which an extra input starts to result in some results. It also helps in understanding when the inputs are no longer contributing to any profit in the production.
2. Resource allocation: It helps in identifying the efficient allocation of resources and helps to determine which input is contributing towards making the most of the outputs.
3. Investment decisions: Marginal products help businesses know where to invest in additional resources and the areas of production that can benefit from any other investments.
4. Maximising profits: It aims to equalise the marginal product of an input with its cost by using inputs optimally and maximising profits.
5. Identify production capacity: Marginal product guides businesses to understand their production capacity by helping them to make decisions like scaling up or down production as per marginal returns.
6. Cost management: It makes sure that the cost of an extra input does not increase the revenue generated by its marginal product.
7. Pricing strategies: It influences the pricing and costing strategies by understanding the cost that is associated with additional production and helping in setting up competitive prices to maintain profits.

Analysing the Relationship Between Marginal Product and Total Product

The relationship between marginal product (MP) and total product (TP) is important for analysing the production process and making informed decisions for sellers. The relationship between marginal product and total product can help you identify the efficiency of input and understand the stages. Before looking at their relationship, let us first understand what marginal product and total product mean:

1. Total product (TP): it is the total quantity of the output produced by a company using different combinations of inputs. It is the result of all the inputs used to get the output.
2. Marginal product (MP): It is the additional output that is generated by using one or more units of inputs while keeping other inputs constant. It is calculated as per the change in the total product output by changing an input quantity.

The relationship between marginal product and total product can further be analysed through different stages of production, like:

Distinguishing Between Marginal Productivity and Marginal Cost

The difference between the marginal productivity and marginal cost for sellers is explained below.

Aspect	Marginal productivity (MP)	Marginal cost (MC)
Definition	It is an additional output that is produced by adding one or more units of input.	It is an additional cost which is incurred by producing one or more units of output.
Focus	It focuses on the output (production side).	It focuses on the cost (financial side).
How to calculate?	Marginal productivity = change in total output/ change in input	Marginal cost = change in total cost/ change in output
Measurement	With the help of units of output per unit of input.	With the monetary unit of per unit of output.
Uses	It is used to analyse the efficiency and productivity of inputs.	It is used to determine the cost-effectiveness of production levels.
Relation to total product	It directly affects the total product, as the total product increases with the increase in marginal productivity.	It is inversely related to the total product.
Optimal level	Optimal input usage is when marginal productivity equals the cost of the input to ensure maximum productivity.	The optimal production level is when marginal cost equals the marginal revenue for maximum profits.

Understanding the Principle of Diminishing Returns

The principle of diminishing returns is also known as the law of diminishing marginal returns. It is an economic theory that explains what happens to production when one factor of production is increased while other factors remain constant or the same. The principal explains that as you add more input to a fixed amount of another input, the additional output produced from each extra unit of input will decrease.

For example, imagine a small farm with a fixed amount of land (fixed input) and a different amount of labour (variable input). These are the stages that the farm owner may experience as per the principle of diminishing returns.

• Stage 1: The initial stage of increasing returns:
  • With one worker, the farm produces 100 kg of vegetables.
  • With 2 workers, the farm produces 250 kg of vegetables, and the second worker adds 150 kg more than the first one. This occurs as the second worker helps with tasks and reduces inefficiencies.
• Stage 2: Diminishing returns stage:
  • With 3 workers, the production is 350 kg of vegetables, so the third worker adds only 100 kg.
  • With 4 workers, the production is 400 kg of vegetables, so the fourth worker adds only 50 kg of vegetables.
  • The increase in output is getting less with every additional worker, and the principle of diminishing returns is in play.
• Stage 3: Negative Returns Stage:
  • In other words, the production is 380 kg, which means that the production has decreased by 20 kg.
  • This occurs when workers get into each other’s tasks without enough space or equipment.

Conclusion

In conclusion, we can say that the concept of marginal product plays an important role in optimising production processes. Businesses today can make informed decisions about resource allocation, cost management, and scaling their productions by examining how their inputs are affecting their outputs. The principle of diminishing returns also explains the importance of an exact balance in input usage. 

Marginal product analysis can help businesses increase their efficiency and profitability. Using such economic principles, companies can maximise their production potential and ensure growth in their industry.