Production Theory - Total, Average, and Marginal Product

Total, Average, and Marginal Product

The total product (or total physical product) of a variable factor of production identifies what outputs are possible using various levels of the variable input. This can be displayed in either a chart that lists the output level corresponding to various levels of input, or a graph that summarizes the data into a “total product curve”. The diagram shows a typical total product curve. In this example, output increases as more inputs are employed up until point A. The maximum output possible with this production process is Qm. (If there are other inputs used in the process, they are assumed to be fixed.)

The average physical product is the total production divided by the number of units of variable input employed. It is the output of each unit of input. If there are 10 employees working on a production process that manufactures 50 units per day, then the average product of variable labour input is 5 units per day.

The average product typically varies as more of the input is employed, so this relationship can also be expressed as a chart or as a graph. A typical average physical product curve is shown (APP). It can be obtained by drawing a vector from the origin to various points on the total product curve and plotting the slopes of these vectors.

The marginal physical product of a variable input is the change in total output due to a one unit change in the variable input (called the discrete marginal product) or alternatively the rate of change in total output due to an infinitesimally small change in the variable input (called the continuous marginal product). The discrete marginal product of capital is the additional output resulting from the use of an additional unit of capital (assuming all other factors are fixed). The continuous marginal product of a variable input can be calculated as the derivative of quantity produced with respect to variable input employed. The marginal physical product curve is shown (MPP). It can be obtained from the slope of the total product curve.

Because the marginal product drives changes in the average product, we know that when the average physical product is falling, the marginal physical product must be less than the average. Likewise, when the average physical product is rising, it must be due to a marginal physical product greater than the average. For this reason, the marginal physical product curve must intersect the maximum point on the average physical product curve.

Notes: MPP keeps increasing until it reaches its maximum. Up until this point every additional unit has been adding more value to the total product than the previous one. From this point onwards, every additional unit adds less to the total product compared to the previous one – MPP is decreasing. But the average product is still increasing till MPP touches APP. At this point, an additional unit is adding the same value as the average product. From this point onwards, APP starts to reduce because every additional unit is adding less to APP than the average product. But the total product is still increasing because every additional unit is still contributing positively. Therefore, during this period, both, the average as well as marginal products, are decreasing, but the total product is still increasing. Finally we reach a point when MPP crosses the x-axis. At this point every additional unit starts to diminish the product of previous units, possibly by getting into their way. Therefore the total product starts to decrease at this point. This is point A on the total product curve. (Courtesy: Dr. Shehzad Inayat Ali).