CA Foundation Business Economics Study Material Chapter 3 Theory of Production and Cost – Concepts of Product
Product i.e. output refers to the volume of goods produced by a firm in a particular period of time.
There are three concepts relating to the physical production by factors namely-
- Total Product (TP),
- Average Product (AP), and
- Marginal Product (MP).
1. Total Product (TP):
- The total output produced by all the factors per unit of time is called total product.
- Total product increases with an increase in the variable factor input.
- Column Nos. (1) and (2) of the following table shows a total product schedule.
2. Average Product (AP):
- The. average product means the total product per unit of a variable factor.
- In other words, it is the total product divided by the number of units of a variable factor.<
- Column No. (3) of the following table shows the average product of variable factor.
3. Marginal Product (MP):
- The marginal product means addition made to total product by the use of an extra unit of variable factor.
- It may be stated as-
MPn = TPn – TPn-1
MPn = Marginal product when ‘n ’ units of variable factors are used
TP = Total Product
n = number of units of variable factors used.
- Marginal Product may also be defined as the change in total output due to use of additional unit of variable factor
Δ = a small change Column No. (4) of the following table shows the marginal product schedule.
Table: Product Schedule
|Units of Variable||Total Product (TP) factor E.g. LABOUR||Average Product (AP)||Marginal Product (MP)|
Average product and Marginal product are related to one another.
(i) – When average product of the variable factor is rising, marginal product of the variable factor is more than its average product.
– So when average product curve is rising, the marginal product curve will lie somewhere above it.
(ii) – When average product of the variable factor is falling, marginal product of the variable factor is less than its average product.
– So when average product curve is falling, the marginal product curve will lie somewhere below it.
(iii) – When average product of the variable factor is maximum and constant, marginal product is equal to average product.
– In other words, the marginal product curve cuts the average product curve at its maximum point.