How to Calculate the Average Product of Capital

by Tasos Vossos; Updated September 26, 2017
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In economics, the average product index is used to determine each worker's approximate contribution to the total product. Furthermore, the average product of a set capital allows a company's administration to evaluate whether productivity rises or falls when the labor variable changes. It is not difficult to determine the average product of a set capital within a certain period of time. All you need are simple math skills. However, you must keep detailed records of your company's labor input and production output to come up with a reliable result.

Step 1

Accumulate data regarding the quantity of products produced within a certain period of time, such as a day, a week or a month. It is very important to specify the period of time you examine because you will mention it on the average product result. This variable is called total product (TP) or quantity produced (Q).

Step 2

Use the number of employees working during this period of time as the value of your labor (L) variable. Count each post and not the individuals covering it. For example, if you employ a new worker to cover the newly vacant shift in the middle of the month, count the two employees as one. This is because the new worker just covered the loss of an old one; he did not increase the workforce.

Step 3

Divide Q by L to calculate the average product (AP) of your given period of time. For example, if within a month your quantity produced is 7,000 units and the number of employees in the production process was 200, then the average product per month is 7,000 / 200 = 35.

Step 4

Repeat the process to find out fluctuations in the average product between a series of time periods. Even if you keep the variable capital (K) the same, the labor input can fluctuate, resulting in different total product values. This fluctuations can help you whether AP is on an ascending or a descending trend.

Tips

  • Total product — or quantity produced — is defined as TP = f(L, K). However, it is impossible to set a formula which can calculate TP accurately, before it is even produced. Otherwise, you take the risk of calculating AP based on projections.

    You can also calculate Q — or TP — as the monetary value of quantity produced, instead of units produced. For example, $150 million worth of products made by 3,000 employees within a month equal to an average product of $50,000 per month.

About the Author

Tasos Vossos has been a professional journalist since 2008. He has previously worked as a staff writer for "Eleftheros Tipos," a leading newspaper of Greece, and is currently a London-based sports reporter for Perform Sports Media in the United Kingdom. He holds a Bachelor of Arts in communication and media from the University of Athens.

Photo Credits

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