As we discuss the difference between ‘marginal product’ and ‘marginal cost’ in this write-up lets quickly look at the definition of these two words. According to “the marginal product of labor refers to the number of products a company can manufacture if it hires more workers or assigns its current workers additional hours. The marginal cost refers to the number of amount it costs a company to produce each additional item”. Let’s check an example for better understanding.
Let’s take for example Amsam restaurant, with two workers the restaurant can produce 13 cakes per day which can be considered as the total daily production. There was a time the number of cakes ordered always exceed their production. They decided to hire another two workers and their new daily production is 24. Here we can see that with four workers 11 extra cakes were produced as compared to two workers. This saws us how an increase in a unit of input can contribute to the total output. An increase in marginal product be considered an increase in production.
Let’s take Bilal’s dental lab for example, assuming the production of one unit of denture is D500 and the total cost of producing to units of denture is D700. Here we can see that D200 is the marginal cost of producing the second unit. Also, if a company bought a new machine in order to produce more goods, the cost of that machine will be considered the marginal cost.
Factors Which Give Rise to Economics of Scale
Before directly moving to the factors that which gives rise to economic of scales, lets first throw light to the actual meaning of economics of scale for easy understanding. Economic of scale referred to as the ability of a company to produce goods and services on larger scales with low cost of production. The economic scale of a business is mainly determined by its size. The smaller the business the less cost saved. This can relate to the theory of economic which states that as companies grows in size and production capacity, costs decrease from the expanded operations. When unit production increases during a given period of time, the percentage increase in total cost is less than the percentage increase in total units. Some of the factors that give rise to economic of scale include:
- Efficient Capital. Capital is the financial recourses that give companies the ability to improve and expand their operations. Economics of scale may be achieved through effectively using a mix of depth and equity financing. Positively creating cash flow through profitable operation is another important factor of economics of scale. Companies with good amount of cash can operate better when they focus more on using available to improve and less on generating cash.
- Technology. Modern technology gives companies the access to automatically produce errors cause by human labor. Companies use technological terms such as business software, production robots and computes to develop their economy their economy of scale. Companies also use technological developments specify production technique than can give competitive advantages over other companies. Company gets more cash to spend on expanding operations whenever there is a reduce in expenses.
- Specialization. Firms with large scale of production attracts large number of employees to work efficiently. This brings the idea of specialization to films by splitting jobs into smaller tasks. Each of these individual tasks are assigned to separate workers. In this way workers are given work based on their professional skills leading to proper and time sawing production. Overall result of this is that an average unit is produce at a lower cost.
- Learning. Firms learn from both research and experience as they grow. At early stages firm are growing and have inefficient structure and processes. Firms with high level of research can get access to better process and new formulas pushing their cost per unit even lower.
It is the aim of all companies to make profit that is why determining amount of output and the price per unit of a product is very important in business. After going through marginal product and marginal cost we can realize, that there is a relationship between them. Just like stated “marginal product means the extra quantity of product that is produced. And marginal cost is the cost of producing that extra product”. Marginal cost depends upon quantity of marginal product. Due to the competitive gain that can be achieved, economies of scale are immensely beneficial to a growing business.