When business owners invest in their company by hiring new workers, purchasing new equipment, or ordering more raw materials, they aren’t just doing this for amusement. They are looking for a return on their investment. Specifically, they are looking for increased output, which should theoretically increase the net income of their company. The relationship between increased investment and increased output can be represented through the concept of marginal product.
Meaning of Marginal Product
The marginal product of a business is the additional output created as a result of additional input placed into the company. It is also referred to as marginal product, or MP.
In practical terms, this might mean the additional donuts produced at a donut shop once they hire an extra employee. Or it might mean the additional number of strawberries harvested by a farmer who plants additional seeds. Or the additional revenue a bowling alley receives if it builds extra lanes.
Calculation of Marginal Product
To accurately measure marginal product, one must isolate a specific change in a business and track how that change increases output. As such, there are multiple ways to calculate marginal product:
Most businesses enjoy a variable input—the business’s managers may choose to increase or decrease the amount of labor, raw materials, and raw capital placed into the business. Their choice to vary this input usually comes back to balancing marginal cost with marginal product, with a goal of maximizing profit. As factors of production change, marginal productivity also changes, and so a business's total production and total profit may fluctuate as a result.