Short run product curve
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Intros
Lessons
- Short Run Product Curve Overview:
- Short-Run Constraint
- A short time period
- Capital is fixed
- Only labour, raw materials, etc. can be changed
- Short-run decisions can easily change
- Increasing output in the short-run
- 3 Product Curves
- Total Product Curve
- Marginal Product Curve
- Average Product Curve
- Law of Diminishing Returns
- Features of Marginal & Average Product Curve
- Increases at first, decreases later
- Why?
- Maximizing Average Product
- When MP > AP, you marginally gain more then average
- When MP < AP, you marginally gain less than average
- Maximized when AP = MP
Examples
Lessons
- Deriving Marginal & Average Product Curve
Consider the following information:Labor (workers per week)
Output (candies per week)
0
0
1
15
2
35
3
60
4
80
5
95
6
105
- Consider the following information:
Labor (workers per week)
Output (candies per week)
0
0
1
10
2
30
3
60
4
80
5
90
6
95
- Analyzing Marginal & Average Product Curve
Consider the following marginal product & average product curve.
- Over what output range does the company have increased specialization and division of labor?
- Over what output range does the company's employees have less access to capital, and less space to work in?
- Over what output range does the company have diminishing marginal product and increasing average product?
- At what output is average product curve maximized?
- Consider the following marginal product & average product curve.
- Over what output range does the company have increased specialization and division of labor?
- Over what output range does the company's employees have less access to capital, and less space to work in?
- Over what output range does the company have diminishing marginal product and increasing average product?
- At what output is average product curve maximized?
Topic Notes
Introduction to Short Run Product Curves
Short run product curves are essential tools in microeconomics that help us understand how production changes as we vary a single input, typically labor, while keeping other factors constant. Our introduction video provides a visual and engaging overview of these curves, making it easier to grasp their significance in economic analysis. This article delves into three key components of short run production: total product, marginal product, and average product curves. Each of these curves offers unique insights into the production process and efficiency. The total product curve shows the overall output as we increase the variable input. The marginal product curve illustrates the additional output gained from each extra unit of input. Lastly, the average product curve represents the output per unit of input. By exploring these curves, we can better understand the relationships between inputs and outputs in the short run, providing valuable insights for business decision-making and economic policy analysis.
Understanding Short Run Constraints
In economics, the concept of the short run is a crucial timeframe that businesses and economists consider when analyzing production decisions and market dynamics. The short run refers to a period where at least one factor of production is fixed, while others can be varied. This concept is essential for understanding how firms adapt to changing market conditions and make production decisions.
The short run is characterized by three key features: fixed capital, changeable labor, and easily changeable decisions. Let's explore each of these aspects in detail:
1. Fixed Capital: In the short run, a firm's capital assets remain constant. This includes machinery, buildings, and other long-term investments that cannot be quickly altered. For example, a car manufacturer cannot instantly build a new factory or install new assembly lines to increase production in the short run.
2. Changeable Labor: While capital is fixed, labor is a variable factor in the short run. Firms can adjust their workforce by hiring or laying off employees relatively quickly. This flexibility allows businesses to respond to fluctuations in demand or changes in market conditions. For instance, a retail store might hire additional staff during the holiday season to handle increased customer traffic.
3. Easily Changeable Decisions: Short-run decisions typically involve adjustments that can be made quickly without significant structural changes. These may include altering production schedules, adjusting inventory levels, or modifying pricing strategies. A restaurant, for example, might decide to extend its operating hours or offer new menu items to attract more customers.
The interplay between fixed capital and changeable labor is particularly important in understanding short-run production constraints. As firms increase their labor input, they can generally increase output, but often with diminishing returns. This is because the fixed capital limits the efficiency gains that can be achieved by adding more workers.
Consider a small bakery with a fixed number of ovens. Initially, hiring additional bakers can significantly increase the bakery's output. However, as more bakers are added, the limited oven space becomes a constraint, and each additional worker contributes less to overall production. This illustrates the law of diminishing marginal returns, a key principle in short-run production analysis.
Understanding these short-run constraints is crucial for businesses making operational decisions. It helps them optimize resource allocation, manage costs, and respond effectively to market changes. For economists, the concept of the short run provides a framework for analyzing firm behavior, market adjustments, and the dynamics of supply and demand in various industries.
Total Product Curve
The total product curve is a fundamental concept in economics that illustrates the relationship between the quantity of a variable input and the maximum output that can be produced, given fixed amounts of other inputs. This curve is essential for understanding production processes and making informed decisions about resource allocation.
To better grasp the concept, let's consider an example from a hypothetical manufacturing company. Imagine a small factory that produces widgets. The factory has a fixed amount of machinery (fixed input), and we'll examine how the total product changes as we vary the number of workers (variable input).
Here's how we can calculate and graph the total product curve:
- Collect data on the number of workers and the corresponding total output.
- Create a table with two columns: "Number of Workers" and "Total Product (widgets per day)."
- Plot these points on a graph, with the number of workers on the x-axis and the total product on the y-axis.
- Connect the points to form a smooth curve.
For instance, our data might look like this:
- 0 workers: 0 widgets
- 1 worker: 10 widgets
- 2 workers: 25 widgets
- 3 workers: 45 widgets
- 4 workers: 60 widgets
- 5 workers: 70 widgets
- 6 workers: 75 widgets
- 7 workers: 77 widgets
When we plot these points and connect them, we get the total product curve. The curve typically starts at the origin (0,0) and rises at an increasing rate before slowing down and eventually flattening out or even declining.
Understanding attainable and unattainable points on the curve is crucial:
- Attainable points: These are the points on or below the total product curve. They represent production levels that are possible given the current technology and fixed inputs.
- Unattainable points: These are the points above the total product curve. They represent production levels that are not possible with the current technology and fixed inputs.
The significance of these points lies in their practical implications for production decisions. Managers can use this information to determine the most efficient number of workers to employ and to set realistic production targets.
To interpret the total product curve, follow these steps:
- Identify the shape of the curve: Look for the initial steep rise, the point where it starts to level off, and any decline.
- Locate the maximum point: This represents the highest possible output with the given fixed inputs.
- Analyze the slope: The steepness of the curve indicates the rate at which output increases as more variable inputs are added.
- Identify regions of increasing and diminishing returns: The curve typically shows increasing returns in the early stages and diminishing returns later.
- Consider the practical range: Focus on the portion of the curve that's relevant to your actual production capabilities.
The total product curve provides valuable insights into production efficiency. In the early stages, as we add more workers, we see increasing returns to scale. This is where each additional worker contributes more to total output than the previous one. As we continue to add workers, we reach a point of diminishing returns, where each additional worker contributes less to total output than the previous one.
Eventually, we may reach a point of negative returns, where adding more workers actually decreases total output. This could be due to overcrowding, reduced efficiency, or other factors that hinder production when too many workers are present.
By analyzing the total product curve, managers can make informed decisions about:
- Optimal staffing levels
- Production capacity
- Resource allocation
Marginal Product Curve
Marginal product is a fundamental concept in economics that measures the additional output produced by adding one more unit of input, typically labor, while keeping all other factors of production constant. To calculate marginal product, you simply subtract the total product at one level of input from the total product at the next level of input. This calculation reveals the incremental change in output resulting from a single unit increase in labor.
Let's demonstrate the process of creating a marginal product curve using the example from the video. Imagine a small factory producing widgets. We'll start with one worker and gradually increase the number of workers, observing how total product changes:
- 1 worker produces 10 widgets
- 2 workers produce 25 widgets
- 3 workers produce 45 widgets
- 4 workers produce 60 widgets
- 5 workers produce 70 widgets
- 6 workers produce 75 widgets
- 7 workers produce 77 widgets
To calculate the marginal product for each labor increase, we subtract the previous total product from the current total product:
- 2nd worker: 25 - 10 = 15 widgets
- 3rd worker: 45 - 25 = 20 widgets
- 4th worker: 60 - 45 = 15 widgets
- 5th worker: 70 - 60 = 10 widgets
- 6th worker: 75 - 70 = 5 widgets
- 7th worker: 77 - 75 = 2 widgets
Plotting these marginal product values against the number of workers creates the marginal product curve. The shape of this curve is significant and typically follows a pattern of increasing, then decreasing returns. Initially, the curve rises as each additional worker contributes more to production due to specialization and efficient division of labor. However, it eventually peaks and begins to decline as the law of diminishing returns takes effect.
The relationship between the marginal product curve and the total product curve is crucial. The marginal product curve represents the slope of the total product curve at each point. When marginal product is increasing, the total product curve becomes steeper. As marginal product decreases, the total product curve's slope becomes less steep, eventually flattening out when marginal product approaches zero.
Understanding the marginal product concept has several practical applications in business and economics:
- Resource Allocation: Firms can use marginal product analysis to determine the optimal number of workers to employ, maximizing efficiency and profitability.
- Production Planning: By analyzing the marginal product curve, managers can make informed decisions about scaling production and resource utilization.
- Pricing Strategies: Understanding how additional units of labor affect output helps in determining the cost structure and pricing of products.
- Investment Decisions: Businesses can assess the potential returns on investing in additional labor or capital based on marginal product projections.
- Productivity Improvement: Identifying the point of diminishing returns allows companies to focus on improving processes or technology rather than simply adding more labor.
In conclusion, the marginal product curve is a powerful tool for analyzing production efficiency and making strategic decisions. By visualizing how additional input affects output, businesses can optimize their operations, allocate resources effectively, and maximize their productivity. The concept's application extends beyond manufacturing to various sectors, including agriculture, services, and even knowledge-based industries, where understanding the incremental value of each additional worker or resource is crucial for sustainable growth and competitiveness.
Average Product Curve
The concept of average product is a crucial element in understanding production efficiency and making informed decisions in business operations. Average product, also known as average physical product (APP), refers to the output produced per unit of input, typically measured as output per worker or per hour of labor. This metric provides valuable insights into the productivity of a firm's production process.
To calculate the average product, you divide the total product (total output) by the number of units of the variable input used. The formula is:
Average Product = Total Product / Number of Units of Variable Input
For example, if a factory produces 100 units of a product using 10 workers, the average product would be 10 units per worker (100 / 10 = 10).
Creating an average product curve involves plotting the average product values against the number of variable inputs used. Let's consider the example from the video to illustrate this process:
Imagine a small bakery that produces cakes. As the bakery hires more workers, the total product (number of cakes) changes as follows:
- 1 worker: 10 cakes
- 2 workers: 24 cakes
- 3 workers: 36 cakes
- 4 workers: 40 cakes
- 5 workers: 40 cakes
To create the average product curve, we calculate the average product for each level of input:
- 1 worker: 10 / 1 = 10 cakes per worker
- 2 workers: 24 / 2 = 12 cakes per worker
- 3 workers: 36 / 3 = 12 cakes per worker
- 4 workers: 40 / 4 = 10 cakes per worker
- 5 workers: 40 / 5 = 8 cakes per worker
Plotting these values on a graph, with the number of workers on the x-axis and the average product on the y-axis, creates the average product curve.
The relationship between average product and total product is intricate and revealing. As the total product increases, the average product may initially rise, reach a peak, and then decline. This relationship is reflected in the shape of the average product curve, which typically follows an inverted U-shape.
The shape of the average product curve has significant implications for production decisions:
- Rising Phase: In the initial stages, as more variable inputs (e.g., workers) are added, the average product increases. This indicates increasing returns to scale, where each additional unit of input contributes more than proportionally to output.
- Peak: The highest point on the curve represents the optimal level of production efficiency. At this point, the firm is maximizing its output per unit of input.
- Declining Phase: After the peak, the average product starts to decrease. This signifies diminishing returns to scale, where each additional unit of input contributes less than proportionally to output.
Understanding the average product curve helps managers make informed decisions about resource allocation and production scale. For instance:
- Identifying the optimal number of workers to maximize productivity
- Recognizing when adding more inputs may lead to inefficiencies
- Determining the point at which expanding production might require a change in technology or production methods
The average product curve also relates to the law of diminishing marginal returns, which states that as more of a variable input is added to a fixed amount of other inputs, the marginal product of the variable input will eventually decrease. This law explains why the average product curve eventually slopes downward.
In conclusion, the average product curve is a powerful tool for analyzing production efficiency. By understanding how to calculate and interpret this
Law of Diminishing Returns
The Law of Diminishing Returns is a fundamental principle in economics that plays a crucial role in understanding productivity and efficiency in production processes. This concept states that as more units of a variable input are added to a fixed amount of other inputs, the marginal product of the variable input will eventually decrease. In other words, there comes a point where each additional unit of input yields progressively smaller increases in output.
To understand this law better, let's consider its application to product curves. In production economics, we often analyze three key curves: the total product curve, the marginal product curve, and the average product curve. The Law of Diminishing Returns directly influences the shape and behavior of these curves.
The total product curve represents the relationship between the quantity of a variable input and the total output produced. Initially, this curve rises steeply as additional units of the variable input lead to significant increases in output. However, as more units are added, the curve's slope gradually decreases, reflecting the onset of diminishing returns.
The marginal product curve, which shows the additional output generated by each additional unit of input, is perhaps the most illustrative of diminishing returns. This curve typically starts high, increases for a while, reaches a peak, and then begins to decline. The point at which the marginal product starts to decrease marks the beginning of diminishing marginal returns.
The average product curve, representing the output per unit of input, also reflects the Law of Diminishing Returns. It usually rises at first, reaches a maximum, and then begins to fall. The point where the average product is at its highest coincides with the point where it intersects with the marginal product curve.
To illustrate this concept, let's consider a practical example. Imagine a small farm growing tomatoes. The farmer starts with a fixed amount of land and begins adding workers. At first, each additional worker significantly increases the tomato yield. The first worker might plant and tend to a certain number of tomato plants, the second worker might focus on watering and fertilizing, and the third on pest control. Each of these workers contributes substantially to increasing the overall productivity.
However, as more workers are added, the marginal contribution of each new worker starts to decrease. The fourth worker might help with harvesting, but their contribution isn't as significant as the first three. By the time the tenth worker is added, they might find themselves with less meaningful tasks, perhaps just moving equipment around or doing minor tasks that don't significantly boost production. At this point, the farm is experiencing diminishing returns.
The reasons behind the initial increase and subsequent decrease in productivity are multifaceted. In the early stages of production, when resources are abundant relative to the labor input, each additional worker can specialize in specific tasks, leading to increased efficiency. This specialization allows for better utilization of resources and often results in synergistic effects, where the combined effort of workers produces more than the sum of their individual efforts.
However, as more workers are added, several factors contribute to diminishing returns. Firstly, the fixed resources (like land in our farm example) become increasingly scarce relative to the variable input (labor). This scarcity limits the potential for further productivity gains. Secondly, as the number of workers increases, coordination becomes more challenging, potentially leading to inefficiencies. Thirdly, the most productive tasks are usually assigned first, leaving less critical or less productive tasks for additional workers.
Understanding the Law of Diminishing Returns is crucial for businesses and policymakers. It helps in determining the optimal level of input for maximum efficiency and profitability. For businesses, it guides decisions on resource allocation and expansion. For policymakers, it informs strategies for economic growth and resource management.
In conclusion, the Law of Diminishing Returns is a key concept in understanding productivity dynamics. It explains why continually increasing inputs doesn't always lead to proportional increases in output. By shaping the behavior of product curves, it provides valuable insights into the nature of production processes and helps in making informed decisions about resource allocation and economic planning.
Maximizing Average Product
Determining the optimal number of workers to maximize average product is a crucial aspect of production efficiency for businesses. This process involves understanding the relationship between marginal product and average product curves, which are key indicators of workforce productivity. By analyzing these curves, companies can make informed decisions about their optimal workforce size and improve overall production efficiency.
The average product (AP) is the total output divided by the number of workers, while the marginal product (MP) represents the additional output generated by adding one more worker. As businesses increase their workforce, they typically experience different stages of productivity. Initially, the marginal product rises due to specialization and division of labor. However, as more workers are added, the law of diminishing returns sets in, causing the marginal product to decline.
The relationship between marginal product and average product curves is crucial for determining the optimal number of workers. When the marginal product is greater than the average product, the AP curve slopes upward. Conversely, when the MP falls below the AP, the average product curve begins to decline. The point where these two curves intersect is significant as it represents the maximum average product.
This intersection point is critical for businesses aiming to maximize their average product. At this point, the marginal product equals the average product, indicating the optimal number of workers for maximum efficiency. Adding workers beyond this point will cause the average product to decrease, potentially leading to inefficiencies and increased costs.
Practical examples of how businesses can use this information for decision-making are numerous. For instance, a manufacturing company might analyze its production data to determine the point at which adding more assembly line workers no longer increases the average output per worker. This information can help the company avoid overstaffing and maintain optimal productivity levels.
Similarly, a software development firm might use this concept to determine the ideal team size for projects. By tracking productivity metrics, they can identify the point at which adding more developers to a team starts to decrease the average output per person, possibly due to increased coordination costs or communication overhead.
In the service industry, a call center could use this analysis to determine the optimal number of customer service representatives. They might find that beyond a certain number of staff, the average number of calls handled per representative begins to decline, indicating a need to reassess their staffing strategy.
To effectively use this information, businesses should: 1. Regularly collect and analyze production data. 2. Plot marginal product and average product curves. 3. Identify the intersection point of these curves. 4. Use this information to guide hiring decisions and workforce planning. 5. Continuously monitor and adjust as market conditions or technology changes.
It's important to note that the optimal number of workers can change over time due to factors such as technological advancements, changes in worker skill levels, or shifts in market demand. Therefore, businesses should periodically reassess their workforce needs to maintain maximum efficiency.
In conclusion, understanding how to determine the optimal number of workers to maximize average product is essential for businesses striving for production efficiency. By carefully analyzing the relationship between marginal product and average product curves and identifying their intersection point, companies can make informed decisions about their workforce size. This approach helps in optimizing resource allocation, improving productivity, and ultimately enhancing overall business performance in a competitive market environment.
Conclusion
Understanding short run product curves is crucial for effective economic analysis and informed production decisions. These curves, including the total product, average product, and marginal product curves, provide valuable insights into a firm's productivity and efficiency. By grasping these concepts, businesses can optimize their resource allocation and maximize output. The relationship between these curves helps managers identify the most efficient production levels and make strategic choices about input utilization. Reviewing the introduction video offers a visual representation of these complex ideas, reinforcing your understanding. As you move forward, apply this knowledge to real-world scenarios, analyzing production processes and making data-driven decisions. Consider exploring advanced topics in production theory to further enhance your economic expertise. Remember, mastering short run product curves is not just academic; it's a powerful tool for business success and economic comprehension. Take the next step in your learning journey by delving deeper into production economics and its practical applications.
Short Run Product Curve Overview:
Short Run Product Curve Overview: Short-Run Constraint
- A short time period
- Capital is fixed
- Only labour, raw materials, etc. can be changed
- Short-run decisions can easily change
- Increasing output in the short-run
Step 1: Understanding the Short-Run
The short-run is defined as a time period in which the quantity of one or more resources used for production is fixed. This means that certain resources, such as capital, cannot be increased or decreased within this period. The short-run is characterized by its limited time frame, which restricts the ability to acquire additional resources. For example, if a company has a fixed amount of coal or gasoline, it cannot obtain more of these resources in the short-run due to the time constraint.
Step 2: Fixed Capital in the Short-Run
In the short-run, capital such as tools, computers, and buildings are fixed. This is because these types of capital require a significant amount of time to acquire or construct. For instance, building a new facility or acquiring new machinery cannot be done quickly. Therefore, businesses must work with the existing capital they have during the short-run period. This constraint necessitates efficient use of available resources to maximize production.
Step 3: Variable Resources in the Short-Run
While capital is fixed in the short-run, other resources such as labor and raw materials can be adjusted. Businesses can hire or lay off workers, and they can increase or decrease the amount of raw materials used in production. This flexibility allows companies to respond to changes in demand and other market conditions. For example, if a company needs to increase production, it can hire additional workers or purchase more raw materials, even though it cannot expand its capital base.
Step 4: Flexibility in Short-Run Decisions
One of the key features of the short-run is the ability to make and change decisions quickly. Businesses can easily alter their production plans based on current conditions. For instance, if a company initially decides to produce a certain number of units but later finds that demand has decreased, it can quickly scale back production. This flexibility is crucial for adapting to the dynamic nature of the market and ensuring that resources are used efficiently.
Step 5: Increasing Output in the Short-Run
To increase output in the short-run, businesses must focus on optimizing the use of variable resources. By adjusting the amount of labor and raw materials, companies can enhance their production levels. For example, if a company hires more workers, it can produce more units of its product. Similarly, increasing the supply of raw materials can lead to higher output. However, it is important to note that there are limits to how much output can be increased in the short-run due to the fixed nature of capital.
Step 6: Impact of Labor Changes on Output
Changes in labor can significantly affect output in the short-run. If a company hires additional workers, it can increase its production capacity and produce more goods. Conversely, if it lays off workers, production will decrease. The relationship between labor and output is a critical aspect of short-run production decisions. Businesses must carefully consider how changes in labor will impact their overall production and efficiency.
Step 7: Conclusion
In summary, the short-run product curve is influenced by the constraints of fixed capital and the flexibility of variable resources such as labor and raw materials. Businesses must navigate these constraints to optimize production and respond to market conditions. Understanding the dynamics of the short-run is essential for making informed production decisions and maximizing output within the limited time frame.
FAQs
Here are some frequently asked questions about short run product curves:
1. What is the explanation of the total product curve?
The total product curve shows the relationship between the quantity of a variable input (usually labor) and the total output produced, keeping other inputs fixed. It typically starts at the origin, rises at an increasing rate, then at a decreasing rate, and eventually flattens or declines, reflecting the law of diminishing returns.
2. What does the product curve explain?
Product curves explain the relationship between inputs and outputs in production. They illustrate how output changes as more of a variable input is added, while other inputs remain constant. This includes the total product curve (showing total output), marginal product curve (showing additional output from each extra unit of input), and average product curve (showing output per unit of input).
3. Why is the total product curve S-shaped?
The total product curve is S-shaped due to the changing returns to the variable input. Initially, there are increasing returns as specialization and efficiency improve (steep rise). Then, diminishing returns set in as fixed inputs become constraints (curve flattens). Finally, negative returns may occur if too much of the variable input is added (potential decline).
4. How do you find the average product curve?
To find the average product curve, divide the total product by the number of units of the variable input at each level. Plot these values on a graph with the variable input on the x-axis and the average product on the y-axis. The resulting curve typically rises, reaches a peak, and then declines, reflecting changes in production efficiency.
5. What is the difference between the average product curve and the marginal product curve?
The average product curve shows the output per unit of input, while the marginal product curve shows the additional output from one more unit of input. The marginal product curve intersects the average product curve at its peak. When marginal product is above average product, the average is rising; when it's below, the average is falling.
Prerequisite Topics
Understanding the short run product curve is crucial in economics, but to fully grasp its concepts, it's essential to have a solid foundation in certain prerequisite topics. Two key areas that significantly contribute to comprehending the short run product curve are areas between curves and perfect competition in the short run.
The concept of areas between curves is fundamental when analyzing the relationship between marginal and average product curves, which are integral components of the short run product curve. By understanding how to calculate and interpret these areas, students can better visualize and quantify the changes in productivity over different levels of input. This mathematical foundation enables a more profound comprehension of the economic principles at play in short run production.
Moreover, grasping the intricacies of perfect competition in the short run provides crucial context for the short run product curve. This prerequisite topic elucidates the short run constraints in economics, which directly influence how firms make production decisions. By familiarizing themselves with the characteristics of perfect competition, students can more easily understand why and how the short run product curve behaves as it does under various market conditions.
The areas between curves concept helps in visualizing the relationship between total, average, and marginal product curves. This mathematical tool is invaluable when analyzing the stages of production and identifying key points such as the point of diminishing returns. By mastering this prerequisite, students can more effectively interpret the shape and implications of the short run product curve.
Similarly, knowledge of perfect competition in the short run provides the economic framework within which the short run product curve operates. Understanding how firms behave in a perfectly competitive market in the short run helps explain why they continue to produce even when facing losses, and how this relates to the shape of the short run product curve.
By thoroughly studying these prerequisite topics, students build a strong foundation for understanding the short run product curve. The mathematical skills gained from analyzing areas between curves combined with the economic principles of perfect competition in the short run create a comprehensive toolkit for interpreting and applying the short run product curve concept in various economic scenarios.
In conclusion, mastering these prerequisite topics is not just about accumulating knowledge; it's about developing a holistic understanding of how different economic and mathematical concepts interrelate. This interconnected knowledge allows for a deeper appreciation of the short run product curve and its significance in economic analysis and decision-making.
Short-Run Constraint
Short run: is a time period in which the quantity of one or more resources used for production is fixed.
In the short run:
- Capital (tools, computers, buildings) is fixed
- Resources like labour can be changed
- Decisions can be easily changed
In this section, we will look at how the changes in labour affect the output in production.
3 Product Curves
Total Product: the maximum output a given quantity of labor can produce.
Marginal Product: The additional output gained from increasing one-unit of labor.
Average Product: The total product divided by the quantity of labor.
Law of Diminishing Returns
Notice from the marginal and average product curve that the law of diminishing returns applies.
Notice the 2 features:
- Both curves increase due to specialization and division of labour.
- Both curves decrease later due to less access to capital, and less space to work.
In other words,
Maximizing Average Product
How can we maximize average product? Let’s look at the marginal & product curve in one graph.
- When MP > AP, the additional one-unit increase gives more output than the average output gained.
- When MP < AP, the additional one-unit increase gives less output than the average output gained.
- When MP = AP, the additional one-unit increase gives the same output as the average output gained.
Therefore, average product is maximized when MP = AP.