Measures of Production
In production, businesses strive to make the best use of their available resources, such as labor, capital, and raw materials, to produce the highest possible output. Economists use several important concepts to measure and understand how efficiently these resources are being utilized. Let’s break down these key concepts in more detail:
1. Total Product (TP)
- Definition: Total Product refers to the total quantity of output produced from all the inputs used in the production process. It represents the overall production level resulting from combining resources like labor, capital, and materials.
- Importance: TP is useful to gauge the overall effectiveness of the production process and to observe how output changes as more inputs are used.
2. Average Product (AP)
- Definition: Average Product is the total output divided by the number of units of input. It tells you the average output produced by each unit of input (e.g., per worker or per machine).
- Formula: AP=TP/L Where:
AP is the Average Product.
TP is the Total Product (total output).
L is the number of units of input (like the number of workers or machines).
- Importance: AP helps businesses understand how productive each unit of input is on average, providing insights into how well resources are being utilized.
3. Marginal Product (MP)
- Definition: Marginal Product is the additional output produced when one more unit of input is added to the production process, keeping all other inputs constant. It helps businesses assess the value and impact of adding more resources.
- Formula: MP=ΔTP/ΔL Where:
- MP is the Marginal Product.
- ΔTP is the change in total output (Total Product).
- ΔL is the change in the number of labor units (or other inputs).
- Importance: MP helps businesses determine how productive the next unit of input will be and whether it’s worth adding more of that input. It also reflects diminishing returns in many production processes, where adding more workers or machines leads to smaller increases in output.
4. Productivity Ratios
- Definition: Productivity ratios compare the output generated by a certain level of input across different industries, time periods, or firms. They offer a way to assess efficiency in using resources to create output.
- Examples:
- Labor Productivity: The amount of output produced per unit of labor (e.g., per worker).
- Formula: Labor Productivity=TP/L
- This could help a company assess how productive each worker is in producing goods.
- Capital Productivity: The amount of output produced per unit of capital (e.g., per machine or equipment).
- Multifactor Productivity (MFP): This is a more complex ratio that compares the combined outputs to the combined inputs of both labor and capital.
- Importance: These ratios provide insights into how efficiently businesses are using their resources. Comparing productivity ratios over time or between industries can help identify areas for improvement or competitive advantage.
- Labor Productivity: The amount of output produced per unit of labor (e.g., per worker).
Relationship Between TP, AP, and MP
Understanding the interaction among Total Product, Average Product, and Marginal Product is crucial in production theory. These relationships help us understand how output behaves when variable inputs, like labor, are increased while keeping other inputs constant.
When Marginal Product (MP) > Average Product (AP), AP Increases
Explanation:
If the additional unit of input (e.g., the next worker) adds more to the total output than the current average, then the average output per unit input will rise.
Example:
Suppose:
- With 2 workers, the total output is 20 units → AP = 10 units per worker.
- A 3rd worker increases total output to 36 units → MP = 16 units. Since MP (16) > AP (10), the average product increases.
Why it happens:
The new input is more productive than the current average, so it pulls the average up.
When Marginal Product (MP) = Average Product (AP), AP is at its Maximum
Explanation:
When the marginal product equals the average product, the average product reaches its highest point and becomes constant at that level.
Example:
If the average product is 12 units, and the additional worker also contributes 12 units, then the new average remains 12. Since it does not rise or fall, the AP is at its maximum.
Why it happens:
The additional input neither adds more nor less than the average, so the average stays the same.
When Marginal Product (MP) < Average Product (AP), AP Decreases
Explanation:
If the additional input contributes less than the current average output, the overall average decreases.
Example:
- 4 workers produce 48 units → AP = 12 units.
- A 5th worker raises total output to 57 → MP = 9 units. Since MP (9) < AP (12), AP decreases.
Why it happens:
The less productive additional unit pulls the average down.
Total Product (TP) Increases as Long as Marginal Product (MP) is Positive
Explanation:
As long as each additional input adds a positive number of units to the total output, the total product will keep rising.
Example:
Even if the MP is decreasing (say, from 16 to 12 to 8), as long as it’s still positive, TP continues to increase.
Why it happens:
You are still adding output to the total, just at a slower pace.
Total Product (TP) is Maximum When Marginal Product (MP) is Zero
Explanation:
When the next unit of input adds nothing to the output, the total product reaches its peak.
Example:
If adding the 7th worker does not change the total output, then MP = 0, and TP is at its maximum.
Why it happens:
The firm has reached its maximum production capacity with the given resources.
Total Product (TP) Starts Declining When Marginal Product (MP) Becomes Negative
Explanation:
If the additional input actually reduces total output, MP becomes negative, and TP begins to fall.
Example:
Adding an 8th worker reduces total output from 70 to 68. So MP = -2, and TP declines.
Why it happens:
Too many inputs may overcrowd the workspace or cause inefficiencies, lowering total output.