# What Is the Formula for Calculating the Marginal Product?

by Sue-Lynn Carty ; Updated May 01, 2018

The marginal product is the change in the production output resulting from a change in a production input. When companies calculate the marginal product, they must hold all factors, with the exception of the increase in units of labor, constant. This means that only the units of labor change and other factors such as property, plants and equipment available for production remain the same.

## Purpose

Calculating the marginal product allows companies to see the increase in the number of items produced per one unit of labor added. The definition of one labor unit can vary by company, but typically, one employee is one labor unit. The goal for the company is to find the number of employees it must hire to achieve maximum production and maximum revenue. Too few employees means you won't have enough to be productive. Too many employees means you'll spend more than you're bringing in. Both are a problem for any growing business.

## Marginal Product Formula

The marginal product formula is the change in quantity (Q) of items produced divided by the change in one unit of labor (L) added (change in Q divided by change in L). The denominator in this equation is always one because the formula is based on each one unit of increase in labor. Companies can just as easily find the marginal product by subtracting the previous quantity of items produced from the current quantity of items produced.

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## Marginal Product Example

A hat maker finds that he can produce five hats a day. After hiring an employee, he finds that his shop can produce a total of eight hats a day. The change in labor units is one. The change in the quantity of times produced is three (8 – 5 = 3). This is the numerator of the equation. The denominator is one. The marginal product in this example is 3/1 = 3.

## Marginal Costs and Revenue

As a company hires each new employee, it incurs increased labor costs, called marginal costs. At the same time, the company is increasing its marginal product. This translates into an increase in revenue, called marginal revenue productivity. When marginal costs and marginal revenue productivity are equal, the company stops hiring new employees. If the company continues to hire employees after this point, its marginal product and revenue decrease while the cost of daily operations increases. Economists refer to this as the law of diminishing returns.

#### About the Author

Sue-Lynn Carty has over five years experience as both a freelance writer and editor, and her work has appeared on the websites Work.com and LoveToKnow. Carty holds a Bachelor of Arts degree in business administration, with an emphasis on financial management, from Davenport University.

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check cashing laws by statepay juniper credit carddebt capitalization ratioifrs effective interest rate methodwithdrawing from a mutual fundtax free ira withdrawalexplain insurance deductibleshow to get marginal utilitypell grant income guidelinesrelease of collateral assignment formirs form 1040 instructionshow long until car gets repossessedrefinance upside down mortgagew-4 exemption from withholdinghealth insurance pros and consfree checkbook registercashing out inherited irawinnings tax calculatorssdi child benefitsdifference between qualified and nonqualified dividendsflowchart converterwhat to do if your ss card is stolendifference between garnishee order and attachment orderclaiming 1 or 0 on w4ach debit meansdda bank accounthow to pawn an engagement ringtrailing earningdecree of legal separationira capital gains taxva foreclosure waiting periodwhat is a warranty deed in texasis tuition reimbursement taxablepros and cons of balanced budgettennessee lemon law used carschase savings withdrawal limit feetexas judgment interest ratelottery winning calculator after taxesforeclosure reinstatement periodwhen does a trust become irrevocablechase atm limit withdrawalclaiming the lottery anonymouslyaz form 140 instructionsgrants for single mothers in nc1040 sch dpurple heart pickup marylandvertical analysis definitionlost usps money orderwhat are my ee savings bonds worth todayred cross cpr certification lookuphow do you cash a western union money orderwhat is deficit financingdouble ee savings bondswhat does dislocated worker meanhow to get missed payments removed from credit reportidentity theft credit cardsjcpenneys bill payobama grants for single momshow to stop ssi paymentswhat happens after underwriter approved loancalculate budget varianceroth ira options tradingscholarships for having scoliosishow to fill out a 1040ezwhere do i report 1099 rdividend reinvestment plan disadvantagesdonate dryertax rate single vs marriednet income in cash flow statementfed withholding percentageaarp medicarecompletetax credits on dividendshow long does h&r block refund takecredit card expiry date validationsingle family attached vs detachedletter of intent real estate samplehud homes for sale illinois
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