3.2 Marginal Product and Diminishing Returns

Total, Marginal, and Average Product

Total product (TP) is the total output produced with a given amount of a variable input (usually labor). Marginal product (MP) is the extra output from adding one more unit of input: MP = ΔTP/ΔInput. Average product (AP) is output per unit of input: AP = TP/Input. MP tells you whether TP is rising, at a max, or falling.

Law of Diminishing Marginal Returns

As more units of a variable input (labor) are added to a fixed input (capital/land), marginal product eventually decreases. At first, MP may rise (increasing returns) as workers specialize, but beyond some point each added worker adds less extra output because they share the same fixed resources — leading to diminishing marginal returns.

Relating MP and AP

When MP > AP, AP is rising; when MP < AP, AP is falling; MP = AP at AP's maximum. TP is maximized when MP = 0; beyond that, MP is negative and TP falls. These relationships mirror marginal/average cost curves and explain the shape of short-run cost curves.

Key terms

Marginal Product (MP)

The additional output produced by adding one more unit of the variable input; MP = ΔTP/ΔInput.

Average Product (AP)

Output per unit of variable input; AP = TP/Input.

Law of Diminishing Marginal Returns

As more variable input is added to a fixed input, marginal product eventually decreases.

Where TP is maximized

Total product reaches its maximum when marginal product equals zero.

MP vs. AP relationship

AP rises when MP > AP, falls when MP < AP, and MP = AP at AP's maximum point.

Try an AP-style question

What is the marginal product of the 3rd worker?

1. 35
2. 10
3. 11.7
4. 15