Question

Define the following

i. Average Product

ii. Marginal Product

iii. The Production Function

Answer 1

Average Product

Average product is the unit of output produced per factor of production while keeping other factors of production constant.

Higher the average product of a factor of production means hihger the productivity of the factor and viceversa.

Average product =   Total product (in units)

Total factor of production( in units)

Average product is the output per worker employed or output per unit of capital employed.

Marginal product

Marginal product is the net addition to the total product by the employment of an additional unit of factor.

It is the net addition to the total product by the additional employment of a unit of worker or capital.

Production Function

• The production function relates the quantity of factor inputs used by a business to the amount of output that result. It is the functional relationsjhip between the input and output. The production is the combined efforts of factors of production namely man-made or nature made. The combined working of these factors result in the production of output and the functional relation betwenn the two is known as production function. The production function is the proportionate relation between the factor input and facto output. It is nothing but input output relation. For example production function is 1:2 it means that 1 factor of production result in 2 output. It shows how much an input emplyed can produce.

Total product (total output). In manufacturing industries such as motor vehicles, it is straightforward to measure how much output is being produced. In service or knowledge industries, where output is less “tangible" it is harder to measure productivity.

Average product measures output per-worker-employed or output-per-unit of capital.

Marginal product is the change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short run.

In shortrun the movement of Total Product, Average Product and Marginal Product can be divided into three stages.

Shortrun is a period where the quantity of all factors cannot be varied accordingly. Only the variable factor can be altered. As such as more and more variable factors are added to the fixed factor of production the total product , average product and marginal product vary disproportionately.

Stage I:

The first stage is the stage of increasing returns in which the total output increases initially with the increase in number of factors.

ii. Stage II:

The second stage refers to the stage in which total output increases but marginal product starts declining with the increase in number of workers.

iii. Stage III:

The third stage is the stages in which the total product starts declining with an increase in number of workers. This is because the total product is the sum total of Average product and Marginal product. As the marginal product falls the total product also falls.

There are three reasons for the increasing returns in stage I and diminishing returns in stage II. There are several factors that are responsible for this. Among these factors, one of the most important factors for increasing returns is fixed capital. Less number of labor lead to unutilized capital, because capital is indivisible.For example, if the capital-labour ratio is 2:6 and capital is indivisible and labor hired is less than six, then capital is unutilized.

Another important factor responsible for the increase of labor productivity is division of labor. This can be achieved by hiring more workers to reach the maximum output or optimum capital-labor ratio.

Beyond the optimum capital-labor ratio, there would be no effect of an increased labor on the productivity of capital because labor can substitute capital to a limited extent. This leads to an increase in the number of workers to compensate the decrease in capital and capital-labor ratio.