Marginal Product of Labor Formula & Examples Video & Lesson Transcript

Let’s take an example to understand the calculation of Marginal Product in a better manner.

In such cases, it is advisable to stop increasing that variable input. Marginal product of labor is the change in output when additional labor is added, such as when an additional employee is hired. It is important to point out that all other factors remain constant. In other words, with marginal product of labor, only the amount of labor changes, not any other factor involved in production.

Marginal Product Formula Calculation

Meanwhile, if the denominator is the change in capital, we call it the marginal product of capital. Wikipedia – Marginal Product – A quick entry on marginal product and how it is calculated. An output increases by 700 in the same period as an input increases by 1,000. StockMaster is here to help you understand investing and personal finance, so you can learn how to invest, start a business, and make money online.

While the limiting process of additional productivity is applicable for enhanced production, knowing the limiting point helps to avoid wastage and get maximum productivity. Total product calculation helps firms to understand how much input can be obtained by using a single input while keeping other inputs constant. Therefore, they can measure the required input to get the desired amount of output. They cannot only organize their production levels depending on the total output, but they can also use the optimal amount of the required input when needed.

After reaching the zero marginal product, adding input will only decrease total output. From the table, when the company adds one worker and becomes 11 people, the total output actually decreases by 5 units, from 195 units to 190 units. Inefficiency and disorganization are the two causes of this reduction in output. An increasing marginal product is when the marginal product’s value is positive and increases when it adds input.

It shows you that the extra unit of input produces a higher output than the previous input. It occurs because the company derives significant benefits from teamwork or task specialization. Usually, the productivity of input increases with an increase in the average product. To calculate the average product, the total product value of the variable input must be known. Once the total product value is obtained, and it is divided by the number of inputs invested, the average product value can be obtained. The term “Marginal Product of Labor” reflects how adding one unit of labor such as hiring one more employee in a company changes the output of the company.

What is Marginal Product?

It is a measure of what the size of the workforce in a company should be in order to maximize its profits and productivity. Well, the marginal product of labor is 2.5, which is the quota that the new employees would need to meet. In other words, if the 2 new employees were able to produce 2.5 cars, then all of your car factory employees would be able to meet the change in demand to produce 15 cars instead of 10 a month.

Marginal product can be defined as an increase in total production of a factor of production that is capital, labor, land, etc., resulting from the increase in one unit in the factor of production. One of the main objectives of any business is to increase productivity and profit. Calculating the marginal product of labor can help employers make major decisions regarding the number of employees and the productivity level of the business or company to maximize profit. And if you are interested in learning this concept, then you are in the right place. Measuring the marginal product of labor for each new employee hired will illustrate the law of diminishing marginal productivity. The MPL number is significant because it helps businesses to understand how an additional employee will impact the productivity of its workforce, whether it be negatively or positively.

Marginal Product Example

For the last year, you’ve been able to produce cars fast enough, and efficiently enough, to meet demand and fill all orders. However, your company is introducing a new design next year, and it anticipate large orders. You realize that you’ll need to hire additional employees to create more output, but how many? You can figure this out by determining the marginal product of labor.

Similarly, a cement company would measure the number of cubic yards of cement produced depending on changes in input, which could be in the form of labor or raw materials. For example, when an excess of raw materials is added to the production process, it may reduce the output instead of increasing it. The law of diminishing marginal utility is applicable to the production of all types mentioned above. So, for each additional input, the change in output is 5, which is the marginal product. The average product shows the production output per unit input of the variable. Now, find out the marginal product of labor of BizKit Ltd. for the newly hired workforce and compare the productivity level of the new workforce with the old one.

Total Product

If the 2 new employees are unable to meet their quota, then you will need to reassess your change in labor, which will change your MPL. However, it is important to note that an increase in input does not always result in an increase in output. As businesses grow, there reaches a point where an addition of a unit of production results in slower rates of production. The marginal product of raw material is the additional output that comes into being on the addition of raw materials used in the production process. Consider a farmer who purchases additional land to as a way of farming on a much bigger piece of land. The marginal product of capital tracks how changes in capital, which is one of the main factors of production, affect the overall output.

This can reduce the wastage of resources and can let producers use the optimum amount of raw materials. So, in this example, we can see that the marginal product of labor of the new employees is 3,200 units per labor. And this has resulted in an increase in the productivity level from 2,000 units per labor in the fiscal year 2019 to 2,400 units per labor in the fiscal year 2020. It helps companies and businesses decide whether hiring additional employees will benefit the business/company or adding extra manpower is not worth the cost. Keep in mind, MPL (Marginal Product of Labor) is not always proportional to the output directly produced by the added employees. In this article, we will explain how to calculate marginal product but before that, lets define marginal product.

Average Product and Marginal Product of Labor

The marginal product calculates the total change in output for an additional amount of input. The idea behind calculating marginal product is to isolate each input and check the output. In other words, the total product is an output for a variable input that can change but when the process maintains all other inputs unchanged. In this article, I’ve how to calculate marginal product briefly explained the concept of marginal product of labor, showed you the formula and discussed how to calculate it with several practical examples. After reading this, hopefully, you have a clear idea about how you can calculate it and apply it in real life. Let’s consider the case of a hypothetical company “BizKit Ltd.” for this example.

In some cases, an increase in input might result in a decrease in total output. If that was to happen, then a business is said to have plunged into negative marginal productivity. A car company can only continue to produce more cars if there is strong demand in the market. If there is no demand in the market and the company continues to make cars, it is likely to plunge into negative marginal product. The formula for calculating the marginal product of labor (MPL) can be derived by dividing the change in production output by the change in input labor.

Marginal Product of Labor Examples

The diminishing marginal productivity states that the slight increase in input in a production cycle advances production marginally and may even become negative after a certain point. Almost every business and company reaches a point when hiring even one more employee will not change the productivity level at all. Furthermore, in some cases, this can lead to an overall decrease in productivity. Ultimately, there are just too many employees trying to do only a handful of tasks and as a result, productivity suffers. This article will teach you what the marginal product of labor is and show you the formula for calculating it. This article will also explain to you the steps for calculating the marginal product of labor along with examples to help you learn the concept clearly.

• Hiring an additional person is a large cost, and businesses should be sure that the additional unit of labor will result in significant productivity increases.
• The average product shows the production output per unit input of the variable.
• In some cases, an increase in input might result in a decrease in total output.
• In other words, marginal product is the change in output when one unit of input of one variable is added keeping the other variables constant.
• The marginal output of labor ascertains the additional output that comes about with the hiring of more people to oversee the production process.

Therefore, ERT Ltd.’s marginal product is 2.5 pieces per man hour, which means adding each unit of man hour will increase the daily production output by 2.5 pieces. Economists are usually interested to understand the relationship between inputs and outputs to check the production of goods. Sometimes, inputs may be changed while in some cases some inputs may be kept constant to check the various output levels. Now, find out the marginal product of labor (MPL) for this company at the end of each month. Although coming from microeconomic concepts, marginal returns are also an important concept when you study macroeconomics. One of them is explaining the economic production function to estimate long-run aggregate supply (potential GDP).

Marginal product is referred to as the change in output for a unit change in the input of one variable when other variables are kept unchanged. Moreover, the relation between total product and the factors of production is linear, but once the limit of production is reached, limiting factors start to set in. Economists use it to answer why increasing the stock of capital (to increase the capital-labor ratio) does not necessarily sustain long-term economic growth. Another term for decreasing marginal product is diminishing the marginal product, decreasing marginal return. In the financial world, marginal product is simply the amount of money or wealth accrued, as firms in this sector do not engage in the production of goods and services.