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Wize AP Microeconomics Textbook > Production and Costs

Average Product and Marginal Product

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Average Product and Marginal Product

  • Average product means on average how many products is each worker producing
  • Marginal product means how many additional products is one additional worker producing.

Average Product (AP)= Total ProductL\boxed{\text{Average\ Product (AP)} =\ \frac{Total\ Product}{L}}


Marginal Product (MP)= ∆Total Product∆L\boxed{\text{Marginal\ Product (MP)} =\ \frac{∆Total\ Product}{∆L}}


Examples:
  • If your firm is currently producing 200 books with 10 units of labor, your average product is
    200/10
    =
    20 books
  • If the output increases to 230 books when labor is increased to 11 units, the marginal product of the 11th worker is
    30/1
    =
    30 books


Law of Diminishing Returns – As more workers are hired eventually each additional worker will become less and less productive so marginal product will fall.

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4 Things to Remember from the Graphs

  1. When marginal product is at its maximum, the total product is increasing at the
    fastest
    rate (steepest). In the graph above, this occurs with
    3
    units of labor.
  2. Total product reaches its maximum when the marginal product is equal to
    zero
    . This occurs with
    5
    units of labor.
  3. When total product starts to fall the marginal product is
    negative
    . This occurs anywhere on the right of
    5
    units of labor.
  4. When marginal product > average product, it pulls AP
    up
    which is on the
    left
    side of the graph. When marginal product < average product, it pulls AP
    down
    which is on the
    right
    side of the graph. When marginal product = average product, average product is at its
    maximum
    . This occurs at
    4
    units of labor.



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Example: Marginal and Average Product

Your business has 15 units of labor and the current output of milkshakes is 150 units. You hire one more unit of labor and the output increases to 155 milkshakes. What will happen?
A) average product may rise or fall
B) average product will rise
C) average product will fall
D) average variable cost will fall

C
The average product = total product / L = 150/15 = 10 milkshakes per worker. The marginal product is Change in total product/change in L, which is 5/1 = 5. Since marginal product is below average product it will pull it down.

Practice: Marginal vs Average Product

Which of the following statements about the relationship between marginal product and the average product is correct?