Concepts of Production

Concepts of Production

In the production process, the output or product may be described in three (3) ways in economics: Total Product (TP), Average Product (AP), and Marginal Product (MP).

1) Total Product (TP):

Total Product is the maximum output that a firm can produce over a given period of time when it employs a given set of inputs.

2) Average Product:

Average Product is the output per unit of the variable factor employed. In other words, it is the productivity of the variable factor. It is measured by dividing Total Product (TP) by the amount of variable factor employed i.e.

\(AP = \cfrac{TP}{\text{Variable factor employed}}\)

Average Product is measured in respect of a variable factor. For instance, where the variable factor is labour (L), then, it is the Average Product of Labour (APL) or the productivity of labour that we can measure as:

\(AP_L = \cfrac{TP}{L}\)

From this, it can be gotten that \(TP_L = AP_L \times L\).

3) Marginal Product (MP):

Marginal Product is the change in the Total Product resulting from the use of one more (or less) unit of a variable factor. It may also be explained as the rate of change in Total Product with respect to a variable factor i.e.

\(MP = \cfrac{\Delta TP}{\Delta \text{Variable Factor}}\)

Where \(\Delta\) = Change.

For example, the Marginal Product of Labour (MPL) is measured as:

\(MP_L = \cfrac{\Delta TP}{\Delta L}\)

Table: A Short-Run Production Schedule

The table above shows a short-run production schedule. It is a short-run schedule because it has a fixed input (capital) as well as a variable input (labour). From Table 8.1, it is observed that as the employment of the variable factor (labour) increases, Total Product also rises from zero (0) to six hundred and sixty (660) when the employment of labour is seven (7). Any additional employment of units of labour (i.e. when labour is eight (8) units and above) causes the Total Product to decline to four hundred and sixty (460) when ten (10) units of labour are employed.

The Average and Marginal Products of Labour as depicted in Table 8.1 increase, but, both eventually decline. Marginal Product declines to zero (0) and even turns negative after the employment of the seventh unit. Average Product, on the other hand, declines but, remains positive so far as Total Product remains positive.

Figure: Total Product, Average Product, and Marginal Product Curves

The figure above is plotted from the table above. The figure shows the relationship between MP_L, AP_L, and TP_L. The MP_L curve cuts the AP_L curve at the maximum of the AP_L curve. The AP_L curve rises as long as the MP_L curve is above it. At the highest point of the MP_L curve, the TP_L curve starts to experience diminishing returns to variable proportions. At the maximum of the TP_L, MP_L is equal to zero (i.e. the MP_L curve intersects with the horizontal axis). When AP_L begins to decline, the MP_L curve is below the AP_L curve. AP_L rises and falls, but never reaches zero (0).