Health Economics Series: Average Productivity and Marginal Productivity

Average productivity (AP) is simply the quotient of the total output (O) divided by the number of units of a certain input (I) [i.e. AP = O / I]. Marginal productivity (MP), on one hand, is the additional output derived from an additional unit of a certain input [i.e. MP = ∆O / ∆I].

Example: Suppose that the Philippine Congress is currently deliberating on a bill that seeks to convert the Aparri District Hospital to Aparri Regional Hospital. One of the factors considered in this type of hospital conversion is the increase in the hospital’s authorized capacity which entails the creation of new plantilla positions. We take nursing personnel in the Out-Patient Department as the focus of this example. Table 1 shows the relationship between the nursing input (number of nursing staff), and the desired output (measured in the number of patient visits / attended).

Table 1. Input, Output, Average Productivity and Marginal Productivity for a Proposed Staffing Complement
Input

(Nursing

Staff)

Output

(Patient

Visits)

Average

Productivity

(O/I)

Marginal

Productivity

(∆O / ∆I)

0 0 0
5 10 2.0 2
10 30 3.0 4
15 45 3.0 3
20 50 2.5 1
25 55 2.2 1
30 60 2.0 1

The average productivity provides an insight into the “production process”. This product simply presents the average quantity of service (in this case, nursing services) produced by a nurse. With five nurses, a nurse can attend an average of two patients. Ten and 15 nurses tend to produce the same average productivity per nurse which happens to be the highest among the other averages. At first glance, decision-makers are given the option to choose whether to allocate funds for ten or 15 nurses. Choosing the latter would mean more nurses employed in the government nursing service.

Since decision-makers want to maximize total product, they will look at how adding extra nurses affects marginal product which contributes to the total product. The table shows that adding more nurses generates fewer services in that it demonstrates the law of diminishing marginal productivity. The incremental nurses become less productive due to constraints imposed by other fixed inputs. Thus, at higher levels of output, the marginal productivity of nurses begins to decline. In order for the government to get value for money, decision-makers will look at options where the marginal product continues to rise. In this case, it is at option 3 (ten nurses). While the average productivity of 15 nurses is the same as that of ten nurses, the marginal productivity actually decreased when five more nurses were added to the nursing pool.

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