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What is Marginal Product?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
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    2003-2016
    Conjecture Corporation
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Marginal product is the amount of increase that takes place when some unit of input is added to the current process of manufacturing a good or service. This additional unit can involve any aspect of the process, ranging from the addition of a specific raw material to the addition of labor. Manufacturers often look closely at the marginal product as a means of making sure the production cycle is functioning at optimum efficiency.

The theory behind the calculation of a marginal product is that there is a point at which adding additional units of some type will not result in any significant increases in output. For example, careful analysis may indicate that the addition of one additional laborer may in fact raise production levels enough to justify the extra expense. However, adding two laborers would either add nothing to the overall production rate, or possibly even cause the rate of production to decrease slightly. In this scenario, the decision would be to add one laborer only.

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The concept of marginal product can be applied to any type of business setting. Even small businesses can make use of the basic model. For example, someone who runs a business from home may find that taking the time to develop separate copy for online and print advertising, rather than recycling the same copy for both purposes, actually yields additional sales. Conversely, the small business owner may find that the effort to create two distinct sets of copy for advertising is counterproductive and does not result in enough additional sales to justify the effort.

With larger businesses, there are usually more variables to consider when it comes to producing goods and services for sale at decent profit margins. The evaluation process will usually begin with the current structure of the operation, then add one variable as part of a simulation. By identifying the impact of that variable on the amount of output, it is possible to determine if that particular change should be made to the production process. If not, then other variables can be identified and tested, until the right combination of units is determined to yield the most desirable results.

At its core, marginal product is simply about learning how to use the tools on hand in the most efficient manner. Taking the time to assess marginal productivity helps businesses avoid the waste of valuable time and resources that could be put to better use. As a result, the business is able to produce more goods and services, and thus strengthen its position in the marketplace.

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