CA Foundation Business Economics Study Material – Concepts of Product

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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-

  1. Total Product (TP),
  2. Average Product (AP), and
  3. 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.<CA Foundation Business Economics Study Material Concepts of Product 1
  • 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
    where,
    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
    CA Foundation Business Economics Study Material Concepts of Product 2
    Where –
    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)
1 10 10 10
2 30 15 20
3 60 20 30
4 80 20 20
5 90 18 10
6 90 15 0
7 85 12.1 -5

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.