Marginal Physical Product (MPP): Definition, Calculation, and Significance in the Cost of Production

Marginal Physical Product (MPP): Definition, Calculation, and Significance in the Cost of Production
Marginal Physical Product (MPP) is a concept used in the field of economics to measure the change in output resulting from employing an additional unit of a specific input factor, while keeping other factors constant. It helps firms understand the relationship between input usage and output levels. MPP is an essential component in determining the optimal level of input usage and analyzing the cost of production.

Calculation of Marginal Physical Product (MPP)
The MPP can be calculated by finding the difference in output levels resulting from a change in the quantity of an input factor. The formula for calculating MPP is as follows:

MPP = (Change in Total Output) / (Change in Quantity of Input)

To calculate MPP, you need to measure the change in total output resulting from adding one more unit of a specific input factor. Then, divide this change in output by the change in the quantity of the input factor.

For example, let’s consider a bakery that produces bread. Suppose the bakery employs three bakers and produces 100 loaves of bread per day. By hiring one more baker, they can increase the number of loaves produced to 120 per day. In this case:

Change in Total Output = 120 – 100 = 20 loaves Change in Quantity of Input = 1 baker

MPP = (20 loaves) / (1 baker) = 20 loaves per baker

Therefore, the MPP in this scenario is 20 loaves per baker, indicating that adding one more baker leads to an additional output of 20 loaves of bread.

Significance of Marginal Physical Product (MPP) in the Cost of Production
MPP plays a significant role in analyzing the cost of production and resource allocation decisions for firms. Here are some key implications:

Optimal Input Usage: MPP helps firms determine the optimal level of input usage. Firms aim to maximize their output while minimizing costs. By analyzing the MPP, firms can identify the point at which employing an additional unit of an input factor becomes less productive. If the MPP starts declining, it suggests that adding more units of the input factor may result in diminishing returns and higher costs.

Resource Allocation: In resource allocation decisions, firms consider the MPP to allocate their resources efficiently. They compare the MPP of different input factors and choose the combination that yields the highest MPP per unit of cost. This ensures that resources are allocated to the inputs that contribute most to output.

Cost Analysis: MPP is also useful in cost analysis. Firms consider the MPP to determine the cost-effectiveness of employing additional units of an input factor. If the MPP is high, it indicates that adding more units of that input factor will result in a significant increase in output, justifying the associated costs. Conversely, if the MPP is low or negative, it suggests that employing additional units of that input factor may not be cost-effective.

Expanding or Contracting Production: MPP assists firms in making decisions regarding expanding or contracting their production. If the MPP is high, it indicates that adding more units of an input factor can lead to increased output and potentially increased profits. However, if the MPP is low or declining, it may suggest that expanding production further may not be beneficial or cost-effective.

In summary, Marginal Physical Product (MPP) measures the change in output resulting from adding one more unit of a specific input factor. It is calculated by dividing the change in total output by the change in the quantity of input. MPP plays a crucial role in determining optimal input usage, resource allocation decisions, cost analysis, and expansion planning for firms. By analyzing the MPP, firms can make informed decisions to maximize efficiency and profitability in their production processes.