Total, Marginal & Average Product - Production Analysis, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

Total Product:

Total product of a factor is the amount of total output produced by a given amount of the factor, other factors held constant. As the amount of a factor increases, the total output increases. It will be seen from Table 16.1 that when with a fixed quantity of capital (K), more units of labour are employed total product is increasing in the beginning.

Table 16.1:

Thus, when one unit of labour is used with a given quantity of capital 80 units of output are produced. With two units of labour 170 units of output are produced, and with three units of labour total product of labour increases to 270 units and so on.

After 8 units of employment of labour total output declines with further increase in labour input. But the rate of increase in total product varies at different levels of employment of a factor. Graphically the total product curve is shown by TP curve in Fig. 16.1. It will be seen that in the beginning total product curve rises at an increasing rate, that is, the slope of the TP curve is rising in the beginning.

After a point total product curve starts rising at a diminishing rate as the employment of the variable factor is increased. The fact that ultimately total product increases at a diminishing rate has been proved by empirical evidence, as shall be seen later in our discussion of the law of diminishing returns.

Average Product:

Average product of a factor is the total output produced per unit of the factor employed. Thus,

Average Product = Total Product/Number of units of a factor employed

If Q stands for total product, L for the number of a variable factor employed, then average product (AP) is given by:

AP = Q/L

We can measure the average product from the total product data given in Table 16.1. Thus when two units of labour are employed, the average product is Q/L = 170/2 = 85. Similarly, when three units of labour are employed, average product is 270/3 = 90 and so on.

From a total product curve TP in Fig. 16.1, we can measure the average product of labour. Thus, when OL₁ units of labour are employed, total product is equal to L1A and therefore average product of labour equals L₁A/OL₁ which would be equal to the slope of the ray OA. Similarly, when OL₂ units of labour are employed, total product (TP) is L₂B which would give us average product to be equal to L₂A/OL₂ the slope of the ray OB. Further, with the employment of labour equal to OL₁ the average product will be measured by the slope of the ray OC.

It has been generally found that as more units of a factor are employed for producing a commodity, the average prod­uct first rises and then falls. As shall be seen from Table 16.1 and the Fig. 16.1, the average product curve of a variable fac­tor first rises and then it declines. That is, the average product curve has an in­verted U-shape.

3. Marginal Product:

Marginal product of a factor is the addition to the total production by the employment of an extra unit of a factor. Suppose when two workers are employed to produce wheat in an agricultural farm and they produce 170 quintals of wheat per year.

Now, if instead of two workers, three workers are employed and as a result total product increases to 270 quintals, then the third worker has added 100 quintals of wheat to the total production. Thus 100 quintals is the marginal product of the third worker.

It will be seen from Table 16.1 that marginal product of labour increases in the beginning and then diminishes. Marginal product of 8th unit of labour is zero and beyond that it becomes negative.

Mathematically, if employment of labour increases by ∆L units which yield an increase in total output by ∆Q units, the marginal physical product of labour is given by ∆Q/∆L. That is,

MPL = ∆Q/∆L

The marginal physical product curve of a variable factor can also be derived from the total physical prod­uct curve of labour. At any given level of employment of labour, the marginal product of labour can be obtained by measuring the slope of the total prod­uct curve at a given level of labour employment. For example, in Fig. 16.2 when OL₁ units of labour are employed, the marginal physical product of labour is given by the slope of the tangent drawn at point A to the total product curve TP.

Again, when OL₂ units of labour are employed, the marginal physical product of labour is obtained by measuring the slope of the tangent drawn to the total product curve TP at point B which corresponds to OL₂ level of labour employment and so on for further units of labour employed.

The marginal product of a factor will change at different levels of employment of the factor. It has been found that marginal product of a factor rises in the beginning and then ultimately falls as more of it is used for production, other factors remaining the same.

That is why in Fig. 16.2 mar­ginal product (MP) of labour as measured by the slopes of the tangents drawn to the total product curve TP at various points has been shown to be rising in the beginning and then diminishing till it becomes zero at the maximum point G of the total product curve.

Thereafter, the marginal product of labour becomes negative. The relationship between average product and marginal product and how both of them are related to the total product will be explained in detail in our analysis of the law of variable proportions.