How does one calculate marginal physical product?
Does he do change in output divided by change in labor, or is it the change in output that results from a changing the variable input by one unit, holding all other inputs fixed?
Marginal output is simply the additional quantity of output that is produced by using one more unit of some input.
So you don't need to divide at all.
What you do is you just take the product after you add the input and subtract the product before you added the input and that gives you the marginal product.
So, for example, let's say you own a t-shirt factory. You currently make 10 t-shirts an hour with one employee. When you hire another employee, your output rises to 30 t-shirts per hour. The marginal product of the second employee was 20 t-shirts per hour.
Marginal physical product (MPP), also called marginal product, is:
the extra output resulting from 1 extra unit of a specified input when all other inputs are held constant. (Samuelson and Nordhaus)
The marginal physical product can be calculated for any factor of production and not just labour.
To calculate the marginal physical product of a factor of production for a given combination of all factors of production and the resultant production, we can increase the the quantity of the particular factor of production by exactly 1 unit and find out the corresponding increase in production. This additional quantity of production is the marginal physical product.
It is not necessary to increase the quantity of a factor of production exactly by 1 unit to find out marginal physical product. We can find out the increase in production corresponding to any small increase in the quantity of factor of production. In such cases the the marginal physical product is calculated as net increase in production quantity divided by net increase in factor of production input quantity.
Samuelson P.A. and Nordhaus W.D., 2005, Economics, Eighteenth Edition, Tata Mcgraw-Hill, New Delhi.