In the theory of demand, individual consumer was considered as an economic unit. Similar to that, in the theory of production, individual firm or industry is the economic unit. Product refers to the volume of goods produced by a firm or an industry during a specified period of time.
image source: i.ytimg.com
It is important to note that product has reference to physical volume (or money value of output), whereas productivity is a ratio and has reference to output per unit of input. We may talk of ‘total factor productivity’ or ‘partial factor productivity’, depending on whether we consider all or one input at a time.
ADVERTISEMENTS:
If more output can be produced by the same input or same output can be produced by less input by minimisation of wastage of raw materials or otherwise, the output per unit input goes up. This productivity enhancement indicates an improvement in physical efficiency of input. Durability of the product produced by an input also shows physical efficiency.
The product (or productivity) can be looked at from three different angles (a) total product, (b) marginal product and (c) average product. Both marginal product and average product can be used as a measure of physical efficiency.
1. Total Product:
The total quantity of goods produced by a firm (or a factor) during a specified period of time is called its total product. Total product of a firm can be raised only by increasing the quantity of the variable factor. Generally, total product goes on increasing with an increase in the quantity of factor employed in the production. But, the rate of increase in total product varies at different levels of employment.
As can be seen from Fig. 8.2, total product rises at increasing rate in the beginning, with increase in the employment of the variable factor. After a point, total product starts rising at a diminishing rate with further increase in the employment of the factor. This fact has proved to be valid both by theory and empirical evidences.
ADVERTISEMENTS:
Increase in the variable factor of production will not always increase the total product. For example, employment of workers beyond the capacity of the factory will cause over-crowding. In such a situation, labour will not be in a position to work most efficiently. Thus, the total product curve slopes steeply upward at first, then flattens out and finally declines. Initially, it is convex from below and then concave from below.
2. Marginal Product or Productivity:
Marginal product of a factor is the addition to the total production by the employment of an extra unit of a variable factor. For example, when 9 workers were employed in Frontier Biscuit Factory Pvt. Ltd., total production of biscuits was 10,000.
Now, if one additional worker is employed, total production rises to 10,500 biscuits attributable to 10 workers. Since tenth worker has added 500 biscuits to the total production, the marginal product of tenth worker is 500 biscuits.
The formula for marginal product is
ADVERTISEMENTS:
MP = TPn – TPn-1
Where TP is total product,
‘n’ is the number of variable factor units and
MPn is the marginal product of nth variable factor unit.
In Fig. 8.2, the slope of the tangent at a point on the total product curve defines the marginal product at that point. Further, MP between two points on the TP curve is the slope of the line joining the two parts; Area under MP curve gives total product.
It would be clear from the Table 8.1 and Fig. 8.2 that marginal product rises in the beginning. It becomes zero, when the total product is maximum. Here, use of additional units of variable factor does not increase total product. Ultimately, marginal product becomes negative with fall in the total product.
3. Average Product or Productivity:
Average product of a factor is the total product (or output produced) divided by the total number of units of a variable factor. Thus,
Average Product = Total product / Number of units of variables factor
In Fig. 8.2, the average product at a point is given by the slope of a ray from the origin upto a point on the total product curve. Inter-industry comparisons of factor productivity are based on average product of the factor.
Average product of workers determines the competitiveness of one’s products in the markets. Further, the wage revisions are linked to average product. The concepts like ‘quality circles’ and ‘worker participation in management’ are also based on average product of workers.
It is clear from the Fig. 8.2 that average product shows almost the same tendency as does the marginal product. Like marginal product, average product also rises first and then it falls. Like marginal product, it is having inverted U-shape.
However, unlike marginal product, average product can never be zero or negative. Further, marginal product exceeds average product, when the latter is rising; equals average product, when the latter is maximum and lies below average product, when the latter is falling. In other words, marginal product rises at a greater rate than the average product.
The marginal product reaches its maximum much earlier than the average product. Thus, when the marginal product starts falling, the average product continues to rise. During the downward phase, both average product and marginal product decline, but, the latter declines at a higher rate.
The relationship among total product, marginal product and average product can be presented in the form of a table given below:
