The average product and marginal product of factors of production (labor, capital). Law of diminishing returns of production factor. Scale effect.

The Average Product (AP) of a factor of production is obtained by dividing the Total Product for a given amount of the factor used by the quantity of that factor used. In the discussion of the short-run, the only Average Product calculation that is meaningful is the Average Product of the variable factor of production. Thus, the Average Product of the variable factor of production is calculated as follows: AP(V) = TP/Q(V) = Q(O)/Q(V).

Formula Average product = Total Output in Units/

Units of Factor of Production

the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor

The marginal product of a factor of production is generally defined as the change in output associated with a change in that factor, holding other inputs into production constant.

The marginal product of labor is then the change in output (Y) per unit change in labor (L). In discrete terms the marginal product of labor is

In continuous terms the MPL is the first derivative of the production function:

Graphically the MPL is the slope of the production function.

The law of diminishing states that in all productive processes, adding more of one factor of production, while holding all others constant will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.

returns to scale and economies of scale are related terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm). They are different terms and should not be used interchangeably. The term returns to scale arises in the context of a firm's production function. It explains the behaviour of rate of increase in the output/production to the subsequent increase in the inputs i.e. the factors of production in the long run.In the long run all factors of production are variable and subject to change due a given increase in size/scale. If output increases by that same proportional change then there are constant returns to scale (CRS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportional change, there are increasing returns to scale (IRS)