Formula to Calculate Marginal Product

The marginal product can be defined as an increase in total production of a factor of production (capital, labor, land, etc.), resulting from the increase in one unit in the factor of production. In contrast, other factors of production are kept constant. The Marginal Product (MP) formula is represented below:

Key Takeaways

  • One can determine the marginal product formula by measuring the quantity or production level change. Then, divide the same by the difference in the factor of production.In most cases, the denominator is one as the formula initially made based on every 1 increment unit in the form of production.The firms need help finding the marginal product by eliminating the last quantity or output level from the current production level.The firm objective is to find the several employees (factor of production type) that must hire to obtain the maximum revenue and output.

When,

  • Qn is the Total Production at time nQn-1 is the Total Production at time n-1Ln is the Unit at time nLn-1 is the Unit at time n-1

Examples

Example #1

QRP Ltd. is a small shop and is in the business of washing the clothes for their customers. QRP Ltd. wants to hire more employees to grow its business. 

Below are the details of the output and number of employees:

You are required to compute the marginal product based on the above information.

Solution:

When 2 employees are hired,

Therefore, the calculation of marginal product is as follows:

= (19 – 10) /(2 – 1)

Marginal Product will be –

  • Marginal Product = 9

When 3 employees are hired,

=  (26 – 19) /(3 – 2)

  • Marginal Product = 7

Example #2

VSP White Rock is fund management and asset management company. Their managers are widely known for generating alpha and providing better returns than the market. Hence, most institutional investors’ choice is VSP White Rock, and even retail individuals have started investing in this fund heavily. However, within the past few months, the returns have been reduced by 10 basis points Basis PointsBasis points or BPS is the smallest unit of bonds, notes and other financial instruments. BPS determines the slightest change in interest rate, to be precise. One basis point equals 1/100th part of 1%.read more within the past few months. Below is the monthly summary for the returns of one of the schemes, “SMC,” that they have generated.

The team wants to analyze whether the funds need to be paused in “SMC” and instead create a new pool called “SMC 2” so that returns do not vanish.

You must calculate the Marginal Product of Capital Calculate The Marginal Product Of CapitalThe marginal product of capital is the change in the output produced by the company when an additional unit of the capital is employed. Assuming the other inputs are constant, the decision to the different investments in the company is taken after comparing the marginal product of the capital.read more returns and advise whether one should create the new fund?

Solution

Here the managers are worried about more inflow of funds, and their returns are diminishing.

When 200 million were invested,

Therefore, the calculation of marginal product is as follows:

= (16.11% – 15.89%)/(200 – 100)

  • Marginal Product = 0.0022%

When 300 million was invested,

= (16.34% – 16.11%)/(200 – 100)

  • Marginal Product = 0.0023%

Similarly, we can calculate till 1000 million was invested.

As seen from the above table, when more funds were invested, the marginal product of returns started diminishing. As a result, the managers lacked the opportunity to invest as most of their ideas would be sufficiently invested. Therefore, they should create a new pool of funds called “SMC 2.”

Example #3

B&B Bros. manufactures product ‘X,’ which requires a lot of labor. Hence, they have hired almost 10-15 laborers per week. Below are the details of output and number of employees: –

The management is concerned with the wages hike and their cost. Hence, they want to determine the optimal production level and lay off the extra work.

You are required to calculate the Marginal Product of labor Calculate The Marginal Product Of LaborThe marginal product of labour formula calculates the change in the level of the company’s output when there is the addition of a new employee. The marginal product of labour is calculated by dividing the total product value by the difference in the labour.read more and advise accordingly.

When they 21 hired laborers,

=  (2,000 – 1,000)/(21 – 12)

=1,000 / 9

  • Marginal Product = 111.11

When 29 labor was hired

=(2,900 – 2,000)/(29 – 21)

=  900 / 8

  • Marginal Product will be =  112.50

Similarly, we can calculate till they hired 74 employees.

We can see from the above table that the optimal production level is when 35 laborers are hired. Post that, the marginal product started diminishing. Hence, the management can lay off anything above 35 to 41 laborers.

Relevance and Uses of Marginal Product Formula

Calculating the marginal product shall allow firms to check for the increase in production level per one unit of a factor of production added. The definition of one factor of a production unit can vary by firm. The objective for the firm is to search for the optimal level of several employees (the type of factor of production) it must hire to achieve maximum revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more and output.

Too few laborers shall mean they are not very productive. But, on the other hand, several laborers could mean they spend more on wages than the output they are bringing in. Hence, both situations are an issue for any business that is growing.

This article is a guide to the Marginal Product Formula. Here, we discussed the calculation of marginal product, examples, and a downloadable Excel template. You can learn more about financial analysis from the following articles: –

The marginal product formula in the short run refers to the change in the output from increasing the workers’ number utilized by one person or by adding a machine to the production process.

The diminishing marginal product formula refers to the approach that utilizes the rising of some inputs(variable inputs)at the production time while holding other constant inputs(fixed inputs), ultimately leading to a productivity fall.

The marginal product(MP) refers to the total output quantity generated by each extra input unit utilized in production. It is calculated by dividing the total product change by the change in the inputs used. The rise in the marginal returns means every additional variable input is more effective than the last input.

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