The term of a Marginal Product means the change of the production output resulting from the changes made in the production input. Every company interested in calculating the marginal product needs to consider all the factors, except for the increase in labor units, constant. In other words, labor change units and other factors like plans, property, and equipment used in production, are the same.
Why is it important to calculate the Marginal Product?
Knowledge of the Marginal Product is important for companies because they can see the exact increase of production, so they know how many more items were produced per one unit of labor. A labor unit has got different definitions but in most cases 1 employee = 1 labor unit. Each company wants to know how many employees are required to generate maximum production rate and maximum revenue. If a company has got too few workers, then it will not be productive. Alternatively, if a company hires too many people, then it wastes money. That is why it is good to calculate the Marginal Product.
A practical Marginal Product formula
It is good to understand that the Marginal Product is the change of the quantity of created items (Q) divided by the change of the added labor unit (L) (so the change by Q is divided by the change by L).
MP = Q/L
This equation includes only one denominator because of the formula that bases on each unit of labor increase. Companies can receive valuable data by subtracting the number of items produced earlier from the current quantity of produced items.
For example, a T-shirt maker knows that he can create five T-shirts each day. He decided to hire an employee and now his company produces eight T-shirts a day. In this example, the change of labor units is 1 (1 employee hired) and the change in the quantity of produced T-shirts is 3 (8-5=3). Based on these pieces of data and the aforementioned equation, we know that the marginal product in this example is 3/1=3.
What are marginal costs and revenue?
Hiring new employees means additional labor costs for a company. They are called marginal costs. On the other hand, a company is also increasing its marginal product at the same time, so it generates higher revenue and this is called marginal revenue productivity. The company should stop hiring more employees when marginal costs and marginal revenue productivity rates are the same. Additional workers hired after reaching this point will not provide profits, because the marginal product and revenue decrease and daily labor costs increase.
As you can see, it is good to know a definition of Marginal Product and it is also great to know how to calculate it. Not everyone has got enough time for these activities, but fortunately, we can find many specialists who can do it, so they will help in reaching the optimal revenue and minimize costs. We can also find special online calculators that can be very helpful and nobody should have problems with finding them. It is only required to use the appropriate phrase in a search engine.