What Is the Relationship Between Average Product and Marginal Product?
Uncover the critical relationship between Average Product and Marginal Product. See how their dynamic interaction guides production efficiency.
Economists and business analysts use productivity concepts to assess how efficiently resources convert into output. Understanding how productivity changes as more resources are employed is fundamental for optimizing operations and making informed decisions. Average product and marginal product are two key metrics in this analysis. These measures provide distinct but related insights into production efficiency, especially when a company adjusts its variable inputs. This article defines average product and marginal product, then explores the critical relationship between them.
Defining Average Product
Average product (AP) quantifies the total output produced per unit of a variable input, assuming all other inputs remain constant. It is calculated by dividing the total quantity of output by the total quantity of the variable input utilized. For instance, if a factory produces 1,000 units using 50 workers, the average product of labor is 20 units per worker. This metric helps evaluate the overall efficiency of an input over a given production period. Businesses often monitor changes in average product to gauge improvements or declines in the efficiency of their variable resources.
Defining Marginal Product
Marginal product (MP) measures the additional output generated by employing one more unit of a variable input, while holding all other inputs constant. It focuses on the incremental change in total production from adding just one more unit of a resource, such as an additional employee or another machine. It is calculated by dividing the change in total product by the change in the quantity of the variable input. For example, if increasing workers from 50 to 51 boosts total output from 1,000 to 1,025 units, the marginal product of that 51st worker is 25 units. Businesses use marginal product analysis to determine productivity gains from additional variable inputs.
The Relationship Between Average Product and Marginal Product
The interaction between marginal product and average product is a fundamental aspect of production theory. When marginal product is greater than average product, the average product will increase. This occurs because the additional output from the new unit of input is higher than the existing average, pulling the average upward.
Conversely, if marginal product is less than average product, the average product will decrease. In this scenario, the added output from the new unit is below the current average, causing the overall average to decline. Average product reaches its maximum level when marginal product equals average product.
This dynamic is explained by the Law of Diminishing Returns. As more units of a variable input are added to a fixed input, marginal product will eventually begin to decline. Even after marginal product starts to fall, it can remain above average product for a period, continuing to push the average upward. However, once marginal product falls below average product, the average product will then begin its own decline, reflecting a decrease in the overall efficiency of the variable input.
Illustrative Example and Practical Implications
Consider a small bakery increasing its workforce to produce more loaves of bread. Initially, adding more bakers (variable input) to a fixed amount of oven space (fixed input) can lead to increasing marginal product, as workers specialize and operations become more efficient. For instance, hiring a fifth baker might increase daily output by 30 loaves, while the average output per baker was 25 loaves, thus raising the average.
As more bakers are hired, they may begin to get in each other’s way, or there might not be enough oven capacity. This leads to a point where each additional baker contributes less to total output than the previous one, signifying diminishing marginal returns. If the sixth baker only adds 15 loaves, and the current average is 28 loaves, the average product will start to decrease.
Understanding this relationship helps businesses make informed decisions about staffing levels and resource allocation. By analyzing where marginal product starts to diminish and where it intersects with average product, managers can identify the most efficient range of operation for their variable inputs. This analysis supports decisions aimed at maximizing production efficiency and optimizing resource utilization, helping to avoid over-staffing that could lead to reduced overall productivity.