Short run product curve

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Intros
Lessons
  1. Short Run Product Curve Overview:
  2. 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. 3 Product Curves
    • Total Product Curve
    • Marginal Product Curve
    • Average Product Curve
  4. Law of Diminishing Returns 
    • Features of Marginal & Average Product Curve
    • Increases at first, decreases later
    • Why?
  5. 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
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Examples
Lessons
  1. 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

    1. Draw the total product curve
    2. Calculate and draw the marginal product curve
    3. Calculate and draw the average product curve
  2. 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

    1. Draw the total product curve
    2. Calculate and draw the marginal product curve
    3. Calculate and draw the average product curve
  3. Analyzing Marginal & Average Product Curve
    Consider the following marginal product & average product curve.
    Marginal & average product curve
    1. Over what output range does the company have increased specialization and division of labor?
    2. Over what output range does the company's employees have less access to capital, and less space to work in?
    3. Over what output range does the company have diminishing marginal product and increasing average product?
    4. At what output is average product curve maximized?
  4. Consider the following marginal product & average product curve.
    Marginal & average product curve
    1. Over what output range does the company have increased specialization and division of labor?
    2. Over what output range does the company's employees have less access to capital, and less space to work in?
    3. Over what output range does the company have diminishing marginal product and increasing average product?
    4. At what output is average product curve maximized?
Topic Notes
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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:

  1. Capital (tools, computers, buildings) is fixed
  2. Resources like labour can be changed
  3. 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.

Total product curve

Marginal Product: The additional output gained from increasing one-unit of labor.

Marginal product curve

Average Product: The total product divided by the quantity of labor.

Average product curve

Law of Diminishing Returns

Notice from the marginal and average product curve that the law of diminishing returns applies.

Law of diminishing returns

Notice the 2 features:

  1. Both curves increase due to specialization and division of labour.
  2. Both curves decrease later due to less access to capital, and less space to work.

In other words,

Hire more workers  \, →  \, Less productivity of workers \, →  \, Less gain in output


Maximizing Average Product

How can we maximize average product? Let’s look at the marginal & product curve in one graph.

Marginal & product curve

  1. When MP > AP, the additional one-unit increase gives more output than the average output gained.
  2. When MP < AP, the additional one-unit increase gives less output than the average output gained.
  3. 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.