The marginal product of an input is the additional production generated by adding one unit of an input. Marginal product is also referred to as the marginal physical product.
How much could a company’s production increase if it increased its labor force by one worker? The answer is the marginal product for labor at that level of output. The same question could be asked about equipment. How much could a piece of equipment increase production? That would be the marginal product of the equipment.
A farmer's marginal product of labor could be the added cucumbers picked when a farmer adds one employee. A restaurant owner may be interested in the marginal product of a stove, which would equal the added meals a restaurant could prepare by adding a stove.
Suppose Sonya just opened a small cabinet shop. Initially, she works by herself and builds three cabinets in a week. But she finds her construction time constrained by the time she spends working with customers and completing administrative tasks. She decides to hire an additional worker who can specialize in construction, Sonya’s company could now manufacture seven cabinets. A third employee (including herself) could increase production to ten. The table below provides a schedule of the number of employees (including Sonya) and the total number of cabinets Sonya's company could produce (total product) with a given number of workers. The marginal product is the added production attributable to an additional employee.
When Sonya hired her first employee, production increased from three cabinets to seven cabinets, so her marginal product equaled four cabinets. Her marginal product decreased from four to three cabinets after adding a third worker. The drop in marginal production illustrates the law of diminishing marginal returns. Finally, a sixth worker actually hinders production. In this case, the marginal product fell to negative one. Perhaps the available space was too constraining to work productively, or Sonya did not have an adequate supply of tools to support a sixth worker.
Marginal Analysis – How Decisions Are Made
Output and Profit Maximization
Capital and Consumer Goods – How They Influence Productivity
Factors of Production – The Required Inputs of Every Business
