Leibniz

3.1.1 Average and marginal productivity

Sakina’s production function, represented graphically in Figure 1, describes how her daily hours of work translate into her final value of output. We have seen that her marginal product at each point is the slope of the function, and her average product is the slope of the ray to the origin. Now we look at how to describe the marginal and average products mathematically.

Figure 1 How does the amount of time spent working affect Sakina’s cloth production?

A general mathematical representation of this relationship is:

where is the rupee value of the final amount of cloth (her output) and is hours of work per day (the input). is the production function.

average product
Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in).

When Sakina is working for hours per day, her average product of labour (APL) is calculated by dividing the rupee value of the final amount of cloth produced by the number of hours worked:

This is the rupee value of average number of cloth prodcued per hour of work. In the diagram, it is the slope of the ray to the origin.

marginal product
The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant.

We have defined Sakina’s marginal product of labour (MPL) as the increase in her cloth produced from increasing work time by one hour. More precisely, it is the rate at which her cloth production increases as work time increases, which corresponds to the slope of the production function.

To see this, suppose that she works for hours a day. To find her marginal product, we consider how her cloth production would change if she increased her work time by hours. If the production increases by , then the change in production per unit change of work time is:

As tends towards zero, this fraction tends towards the derivative of the function. We write:

which is the slope of the production function. In other words, Sakina’s marginal product when she works for hours is given by the derivative of the production function:

This is the calculus definition of marginal product. We shall be using calculus definitions of marginal quantities in subsequent Leibnizes. In the text we calculated the marginal product by finding the increase in output when the input increases by one unit. This gives a good approximation to the marginal product as defined by calculus if individual units are small quantities. For example, in Figure 1 the units are hours, and there are 24 hours on the horizontal axis. The increase in output when the input rises by one hour is a rough approximation to the slope. But if we put minutes on the horizontal axis instead, and calculated the increase in output when the input rises by a minute, we would obtain a very close approximation to the slope of this function.

An example

A production function with properties similar to that of Figure 1 is:

where and are constants such that and ; they determine the precise location and curvature of the production function. We shall explain below why is restricted to lie between 0 and 1. Notice that this function has the standard properties of a production function: when , and when is positive, output is also positive.

The restriction ensures that the production function is increasing for all (this may be clear to you from what you know about exponents (powers), but we will verify it below by showing that the marginal product is positive). This means that the function is not an exact representation of the one in Figure 1, which is constant (flat) for .

The average product of labour is then:

The marginal product of labour is the derivative of the production function:

Note that we can rewrite the MPL as:

We know that when is positive, is positive too. So from this equation you can easily see that implies that the marginal product of labour is positive – in other words, Sakina’s production increases with hours worked.

How about the restriction ? Since the average product of labour is and the marginal product of labour is , is the ratio of the marginal product to the average product. So our assumption that means that the marginal product of labour is less than the average product of labour. You can see this in Figure 1 if you compare the MPL (the slope of the curve) and the APL (the slope of the ray to the origin) shown at the point where .

This property of the production function implies that no matter how many hours of work Sakina chooses, the additional cloth she would produce in one extra hour of work would be less than the average amount of cloth per hour that she has produced so far.

Read more: Section 6.1 and Section 6.4 of Malcolm Pemberton and Nicholas Rau. 2015. Mathematics for economists: An introductory textbook, 4th ed. Manchester: Manchester University Press.