Marginal product is an economic term that refers to additional output generated by utilizing an extra unit of input. It is the measure of change in quantity produced when the input of a factor of production such as labor is increased or decreased by one unit. Ferguson and Gould (2010) define marginal product as the extra output produced by an extra input.
Marginal Product and Marginal Cost
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For example, at General Motors, marginal product is the additional vehicles produced when an extra mechanic is employed. An effective measure of marginal product of a factor of production is achieved when all other inputs are held constant. Marginal product is also referred to as marginal physical product because it measures physical units produced by a firm.
On the other hand, marginal cost refers to the change in total cost of producing an additional unit of output. It is the change in total cost of production caused by reducing or increasing units produced by one. Perloff (2011) simplifies marginal cost as the cost of producing an extra output. According to Perloff (2011), marginal cost includes all costs such as additional wages and raw materials incurred for producing an extra output. Marginal cost usually changes as the level of production changes. Marginal cost is also referred to as differential cost.
Importance of Marginal Product and Marginal Cost
Marginal product is used in short-run production analysis to determine the effects of additional input of factors of production on total quantity produced using the law of diminishing returns. Marginal product is also used by companies to determine supply curves and quantities for fixed input of factors of production. For example, if the marginal product of labor at Toyota is forty, then employing one extra worker would increase production by forty units. Marginal product is used in determining the optimal level of production. This helps companies in realizing the benefits of large scale production (economies of scale).
According to Nicholson (2011), the part of marginal cost curve that falls above its point of intersection with average variable cost curve forms the supply curve of a firm operating in a perfectly competitive firm, hence it can be used to determine the optimal quantity to be supplied to the market. Nicholson (2011) also stresses that firms operating in perfectly competitive markets use marginal cost curves to determine their break-even points (BEP) and profitability. For example, if marginal cost is higher than selling price, then the firm will incur losses, hence should not produce. On the other hand, if marginal cost is lower than the selling price, the firm will gain profits, thus it is advisable to produce.
Managers also use marginal cost during allocation of resources. In order to maximize output and profits, resources must be allocated where marginal revenue exceeds marginal cost. Marginal cost for public goods is also used in determining the impact of externalities of production (positive and negative) such as pollution of the environment. Consumers use marginal cost when making purchases by comparing the cost of acquiring the products to the benefits derived, a process called cost-benefit analysis (CBA).
Use and Misuse of Time-Series Analysis when making Management Decisions
Time-series analysis can be used by companies to predict and forecast future trends such as demand for goods in the market. It is also used in making long-term investment decisions by measuring the performance of a company over a given period of time, for example, return on investments (ROI). Trend analysis can also be used in exploring new business opportunities and finding out areas that need improvement or change in an organization. On the other hand, time-series analysis can be misused by the management during strategic planning process, especially if the information presented is deceptive and ambiguous.