Production Choices and Costs: The Short Run
To study the relationship between a firm's output decision and its costs, we .. Figure shows the links between the firm's total product curve, TP, and its total. Correct A university that benefits from lower costs per unit as it grows is an example of: economies of scale. A variable cost: depends on the quantity of output produced. Correct A variable cost:d. depends on the quantity of output produced. a) Graph the production function for Nimbus Inc. Indicate when the firm b) On a separate graph, graph the Average Total Cost curve and the Marginal Cost.
This point marks the maximum average product of labor. It also marks the point where MPL which is the slope of the total product curve  equals the APL the slope of the secant. Diminishing marginal returns[ edit ] The falling MPL is due to the law of diminishing marginal returns.
Production and Cost
The law states, "as units of one input are added with all other inputs held constant a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline.
The key factor is that the variable input is being changed while all other factors of production are being held constant.
Under such circumstances diminishing marginal returns are inevitable at some level of production. Diminishing marginal returns means that the marginal product of the variable input is falling. Diminishing returns occur when the marginal product of the variable input is negative.
That is when a unit increase in the variable input causes total product to fall. At the point that diminishing returns begin the MPL is zero. The profit maximization issue can also be approached from the input side. Each has a corresponding location on the average or marginal curves. Point A is the inflection point of the total product curve. The marginal product of X the slope of the total product curve increases until this point is reached, after which it begins to decrease.
The second point on the total product curve, B, indicates the output at which the average product and marginal product are equal. The slope of a line from the origin to any point on the total product curve measures the average product of Xat that point, whereas the slope of the total product curve equals the marginal product. The slopes of successive lines drawn from the origin to the total product curve increase until point B, after which their slopes decline.
The average product curve rises until it reaches B, then declines.
Marginal product of labor
The third point, C, indicates where the slope of the total product curve is zero and the curve is at a maximum. Beyond C the marginal product of X is negative, indicating that increased use of input X results in a reduction of total product.
Your grade point average GPA represents the average grade you have earned in all your course work so far. When you take an additional course, your grade in that course represents the marginal grade. What happens to your GPA when you get a grade that is higher than your previous average?
What happens to your GPA when you get a grade that is lower than your previous average? If your GPA is a 3. The relationship between average product and marginal product is similar.
However, unlike your course grades, which may go up and down willy-nilly, marginal product always rises and then falls, for reasons we will explore shortly.
As soon as marginal product falls below average product, the average product curve slopes downward. While marginal product is above average product, whether marginal product is increasing or decreasing, the average product curve slopes upward. As we have learned, maximizing behavior requires focusing on making decisions at the margin. For this reason, we turn our attention now toward increasing our understanding of marginal product. The second tailor adds 2 jackets to total output; the third adds 4.
The marginal product goes up because when there are more workers, each one can specialize to a degree. One worker might cut the cloth, another might sew the seams, and another might sew the buttonholes. Their increasing marginal products are reflected by the increasing slope of the total product curve over the first 3 units of labor and by the upward slope of the marginal product curve over the same range.
The range over which marginal products are increasing is called the range of increasing marginal returns The range over which each additional unit of a variable factor adds more to total output than the previous unit. Increasing marginal returns exist in the context of a total product curve for labor, so we are holding the quantities of other factors constant. Increasing marginal returns may occur for any variable factor.
The fourth worker adds less to total output than the third; the marginal product of the fourth worker is 2 jackets. The data in Figure 8.
TOTAL, MARGINAL, AND AVERAGE PRODUCT Managerial Economics
The additional workers allow even greater opportunities for specialization, but because they are operating with a fixed amount of capital, each new worker adds less to total output. The fifth tailor adds only a single jacket to total output. When each additional unit of a variable factor adds less to total output, the firm is experiencing diminishing marginal returns The range over which each additional unit of a variable factor adds less to total output than the previous unit.
Over the range of diminishing marginal returns, the marginal product of the variable factor is positive but falling. Once again, we assume that the quantities of all other factors of production are fixed. Diminishing marginal returns may occur for any variable factor.
Panel b shows that Acme experiences diminishing marginal returns between the third and seventh workers, or between 7 and 11 jackets per day.