What is Average Product?
Definition: Average product is the number of units produced from a single unit of production. In other words, it’s a productivity measure that shows how productive factors of production are by comparing the total product produced and the number of inputs needed to produce a product.
Average product, usually abbreviated AP, is found by dividing total product by the quantity of the variable input.
Average product =Total output in units / Units of factor of production
The term average product refers to the average output (or products) produced by each input (factors of production like labor and land). It’s a way for companies to measure total output produced with a particular combination of variable inputs.
What Does Average Product Mean?
What is the definition of average product? As the average product increases, so does the productivity of the input. Thus the higher the AP, the more productive the input becomes. Generally, the relationship between total product and factors of production is linear but once a certain point is reached limiting factors begin to set in.
To calculate the average product formula, the total product, or average physical product (APP) must be known. Total product is divided by the quantity of the variable input to find average product.
The higher the average product, the more productive a factor of production is and vice versa. Average product is different from average revenue product which equals the revenue earned per factor of production while keeping other factors constant.
Example
In some countries, footballs and baseballs are still handstitched. This type of labor isn’t common in the United Stated, so it is typically outsourced to other countries. In these foreign countries, building codes and worker’s rights differ from what many Americans are accustomed to.
Let’s say there is a factory in another country that houses the workers who produce these balls. In every factory, there are about 50 workers. The supervisor began hiring new workers a couple months ago when he saw that the average physical product was stagnating.
When the factory first opened, he had 4 employees; he placed one in each corner of the building to prevent distractions. At that point in time, the total product per day equaled 100 balls. If we divide the total product (100 balls) by the number of inputs (4 workers), we calculate an average product of 25 balls per worker.
Satisfied with the productions but wanting more, he continued adding more and more workers until he reached 30. At 30 workers, he noted that they produced 780 balls a day. Thus, each worker produces an average of 26 balls per day.
Limiting Factors to Maximizing Production
Maximizing production isn’t as simple as hiring more employees – sometimes, there are other factors at work. Imagine a team of workers building a brick wall. Obviously, the more workers there are, the faster the wall will go up. But at a certain point other factors limit the effectiveness of new workers.
For example, the rate at which new bricks can be carted to the workers is fixed, meaning eventually some workers will stand around waiting for supplies instead of working, lowering their efficiency overall.
Peak Production Capacity
Real-life production situations have a peak production capacity after which efficiency decreases. In the bricklayer example, the average product would decrease after the brick deliveries failed to keep up with the rate of work, meaning wages paid to each new worker after that point become increasingly worse investments, because the average product decreases. In contrast, the wages paid to workers when the input of labor corresponds to the highest average product are the best investments, because every dollar you spend results in the most possible products.