Total product and marginal relationship management

Relationship Between Marginal & Average Productivity |

total product and marginal relationship management

This mathematical relation between total and marginal surfaces throughout the study of economics, especially utility (total utility and marginal utility), production. The law of variable proportions is used to explain the relationship between Total Product and Marginal Product. It states that when only one variable factor input. The relation between total product and marginal product is one of several that reflect the general relation between a total and the corresponding marginal.

We know that we would not stop in the region where marginal product is increasing and we would not produce in the region where marginal product is negative.

Thus we will produce where marginal product is decreasing but positive, but without looking at the costs and the price that the output sells for, we are unable to determine how many workers to employ.

A production function shows the output or total product as more of the variable input, in our case labor is added. The function shows the regions of increasing marginal product, decreasing marginal product, and negative marginal product. Practice Residential construction crews are often three to eight people depending on the type of work.

Think of what factors would cause increasing and decreasing marginal productivity in construction.

total product and marginal relationship management

Think of another industry and what would be the ideal number of workers? Key Equations Section Short Run Costs Accounting vs. Economics Recall that explicit costs are out-of-pocket expenses, such as payments for rent and utilities, and implicit costs reflect the opportunity costs of not employing the resource in the next best option.

Accounting profits are calculating by subtracting the explicit costs from total revenue. Economic profits go a step farther and also subtract the implicit costs.

Relation between Total Product and Marginal Product

By including implicit costs, we can then determine if the resources are earning at least what could be earned if employed in the next best option. A normal profit is the minimum return to maintain a resource in its current use.

total product and marginal relationship management

If a firm is earning zero economic profit would they still stay in business? A firm that is earning a zero economic is earning a normal profit and there is no incentive to move the resources to another use, since the amount that they are earning is equal to the return that could be earned elsewhere. Practice Using the information below, compute the explicit and implicit costs, the accounting and economic profits. Then explain what will happen in this industry and why. Just as we had the marginal of both of those things, as well.

So here, again, I'm sticking with the employees. So we're looking at labor. And so we've already seen total and marginal, now I'm just adding an average column here.

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And all I've done is I've taken total and divided by the quantity, or the number of employees. So this tells us that, for example, let's say we have three employees, that on average each employee is producing If we were to graph it-- again, your average is this curve right here-- it goes up at first and then falls, just as marginal went up and then fell like that.

Let's talk about actually these two curves and how they're related to one another. So here, where the marginal lies above the average, that would be from here to the left.

The marginal is up above the average. Notice how it's pulling the average up. If I were to use a sports analogy-- I think that actually helps before I go into this specific example-- If I were to use a sports analogy, let's say that a quarterback has a certain average. Let's say we're talking about his average touchdown passes per game. And let's say that his average right now is, on average, he's passing two. So he has two average touchdown passes per game. That would be, obviously, this curve-- his average.

The marginal represents his next game, his next performance. Because marginal means your additional thing. So if, in the next game, he has a really great game and he has, let's say, five touchdown passes, won't that bring his average of two up? That's what's going on here.

total product and marginal relationship management

So with marginal and average product of labor, when we're here, to the left of this spot, adding another worker, one more, will add more than the average to output.

So we'll pull that average up. As soon as that quarterback now has a really bad game, his marginal performance let's say is 0 touchdown passes, that's going to pull his average down. And that's where the marginal lies below the average.

So where a marginal lies below the average, it's going to pull it down.

total product and marginal relationship management

And that would mean that adding another worker will add less than the average to output. It doesn't mean necessarily that they're going to bring overall output down, it just means that they're going to add less than the average to output. And that brings us to a concept called diminishing marginal product, which says that the marginal product of capital or labor will begin to fall at some point, holding everything else constant.

So right here-- I said I would be talking to you about why the curves were shaped the way that they are. Notice how total product is increasing except when we hire the sixth employee. But it's increasing at different rates, and that's what marginal product measures. It measures the rate at which total product is changing.

Relationship Between Marginal & Average Productivity

And at first-- look at how the second employee, what he adds to the firm. He adds actually more than even the first worker. Why would that be? Well if you think about it, specialization can kind of explain that. Hypothetically, a law firm chooses to hire a filing clerk because their paperwork is growing out of control. He files 15 documents an hour.

total product and marginal relationship management

Since he cannot solve the paperwork problem alone, the firm hires another worker: The total from both workers per hour is now 45 documents. The average productivity is formed by simply dividing 45 by the two to get Marginal productivity is different: It is the total output from the two workers minus the first, or, which is Thus, average productivity graphs the output of each worker whereas marginal productivity graphs the output from adding a worker.

Considerations Neither forms of productivity give insight on individual worker performance and statistics or the quality of technology used to perform the job which may boost productivity more than hiring workers.