If you have a business, it’s your responsibility to make sure that the product supply can keep up with the customer demand. That’s why you need to learn how to calculate marginal product. Calculation of marginal products will make sure that the resources of your business are not being wasted.
Although the marginal product is a topic from economics, it also helps a person in his or her individual small business. To keep your production costs low and the supply high, you must calculate the marginal product.
In this article, I will talk about how you can calculate marginal product, the formula of marginal product and the definition of marginal product. Also, I will try to provide other information regarding the marginal product so that you can make the best of this useful formula.
Marginal Product Formula
The marginal product can be calculated by dividing the change in total product and the change in the workforce. To get those values, the previous amount of product and workforce needs to be subtracted from the final amount of production and workforce. Hence, the formula of marginal product is:
Marginal Product: Change in the total product (∆q) / Change in the workforce (∆L)
Some writers have elaborated the formula using two different formulas of calculating the change in total product and workforce. The formula for calculating the change in total product is Qn-Qn-1. Just like that, the formula for calculating the change in the workforce is Ln-Ln-1. The elaborated formula is just dividing those two formulas and making it easier for some students.
How to Calculate Marginal Product?
Before you check the steps to calculate marginal product, take a look at the table below. I will be using this table for making you understand the process of calculating marginal products. The table is small, and that’s why it will be easier for you to understand.
Now, in order to calculate the marginal product, follow the steps below:-
Step 1 – Calculate the change in the total product (∆q): To calculate the change in the total product, you need to apply another formula, which is Qn-Qn-1. Here, Qn is B4 and Qn-1 is B3. In excel, you need to enter “=B4-B3” (without quotation) in the formula bar to calculate this.
Alternatively, you can use your calculator to subtract 20 from 25(if you need a calculator anyway). The answer is 5, which is the change in the total product (∆q). That means after applying ∆L amount of workforce, you have gained 5 products.
Step 2 – Calculate the change in the workforce (∆L): Here, you need to apply the formula for calculating the change in the workforce. The formula is Ln-Ln-1 as I mentioned before. Here, the Ln is going to be A4 and Ln-1 is A3. The application of the formula is the same as the change in total product.
Yes, you should put “=A4-A3” (without quotation) in the formula bar of your excel or use your calculator. The answer is 1, and that is the change in the workforce (∆L). You have gained ∆q amount of product, which is 5 after using 1 workforce.
Step 3 – Calculate the marginal product: After getting the change in total product and the change in the workforce, just divide the values to get the marginal product. The answer is 5. You might think that why don’t you just calculate the change in the total product as that has been the answer?
Well, that’s because the change in the workforce was 1, which might not be the same for every business. Other factors might change the result, so just calculating the change in total product is not going to work.
Marginal Product Definition
Marginal product is the increase of total production after increasing the last unit of the workforce. In short, the extra output produced by an additional worker can be considered as the marginal product. Marginal Product shows you whether you should invest in another worker or not.
If the marginal product is positive and keeps rising, you should keep employing more and more workers. When the current marginal product is lower than the previous marginal product, you can think of whether you should employ more or not. But when the marginal product is negative, you must stop employing workers and possibly let some workers go.
Stuff Affecting Marginal Product
Although primarily two factors are responsible for changing the marginal product, there are a lot of sub-factors in them. First of all, you know that the workforce can change the marginal product. Well, in this article I have talked about the workforce only, according to macroeconomics. But if you have a bigger business, you will have other factors too.
The amount of land you are using to produce the product can be taken into account. Also, the production equipment, the raw materials, etc. can be replaced in the place of the workforce. The final product can be replaced with other outcomes if you want. It all depends on your business, and what you use for production.
Examples of Marginal Product
Here are some examples of marginal products that will help you learn the usage of marginal products. I am sure it will help you understand the concept of marginal product. Let’s start with the examples:-
Pizzar is a pizza shop in a city. The shop has 12 workers right now. They produce around 300 pizzas a day, and there are a lot of customers ordering those now and then. The owner of the shop thought of getting some more workers there so that they can increase the rate of production. After adding a worker, they were able to make 325 pizzas a day.
Then the owner of the shop had another worker. The production went to 330 which is not a satisfactory production rate. So the shop owner decided to calculate the marginal product. The marginal product of the last time was (325 – 300) / (13 – 12) = 25. But this time, the marginal product has become (330 – 325) / (14 – 13) = 5.
You can already see that the marginal product has not increased much. After investigating the matter, the shop owner saw that there were not enough ovens for making the pizza. That’s why even after adding another worker, the marginal product was not satisfactory. Without learning the calculation of marginal product, the shop owner wouldn’t be able to find the issue.
R&R Brothers are producing a product that requires a lot of labor. For now, they have hired 15 workers and can manufacture 30 products. They are thinking about employing more so that the production rate can be increased.
So far they have hired 5 workers more, and they can produce 40 products right now. They hired one more worker at last, and now the scenario is different. They are making 38 products right now. The production has decreased instead of increasing. The marginal product has become negative.
Turns out that the additional worker did not really have a structured job to do. So he has messed up with the entire production and now the production has been decreased. This was revealed only after calculating the marginal product. Now R&R brothers can make a decision for the last worker so that he can benefit the business.
Calculating the marginal product is important for a successful business. I’m sure I don’t have to explain further why that is. Knowing how to keep up with customer demands is an integral part of any business. And in this article, I hope I was able to properly explain to you how to calculate marginal product so that you can do it all by yourself. Thanks for reading.