# Average product

What one can also calculate from the data is the average product of labour, which gives one an indication of the productivity of labour.

Total, marginal and average product

 Variable input labour Total product (TP) Marginal product (MP) Average product (AP) 0 0 --- --- 1 500 500 500 2 1 500 1000 750 3 3 000 1500 1 000 4 4 000 1000 1 000 5 4 500 500 900 6 4 750 250 792 7 4 750 0 679 8 4 500 -250 563

Average product (AP) is equal to the total product (TP) divided by the number of workers employed.

$$\text{AP} = {\text{TP} \over \text{number of workers}}$$

For instance, for five workers, the average product is:

$$\text { }= {\text {4500} \over \text {5}}$$

$$\text { }= {\text {900}}$$

What one can also observe from the figures is that it first increases and then starts to decrease. This is because of the law of diminishing returns.

Read the following paragraph again and decide whether you understand the meaning. If not work through the example again.

The law of diminishing returns states that, as more of a variable input is used, while all the other inputs are fixed (remain the same), each additional unit of the variable input will eventually produce less and less additional output. In economics, we say that the marginal product (MP) of the variable input declines.

#### Activity

If you are confident that you understand the law of diminishing returns do the following activity:

Indicate whether the following statements relating to the law of diminishing returns is true or false:

### The law of diminishing returns only applies if the variable input is labour.

Incorrect. The statement is false. The law of diminishing returns applies to any input. If you keep everything else constant and, say, increase the number of machines, the marginal product of the machines will eventually decrease.

Correct. The statement is indeed false. False The law of diminishing returns applies to any input. If you keep everything else constant and, say, increase the number of machines, the marginal product of the machines will eventually decrease.

### If all inputs change, the law of diminishing returns does not apply.

Correct. The statement is indeed true. The law of diminishing returns only applies to the short run, and the short run is defined as the period in which all the inputs are fixed except one.

Incorrect. The statement is true. The law of diminishing returns only applies to the short run, and the short run is defined as the period in which all the inputs are fixed except one.

Consider the following scenario: