Total Product, Average Product, And Marginal Product

8 Key excerpts on "Total Product, Average Product, And Marginal Product"

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  eBook - PDF

  Price Theory and Applications

  • Steven Landsburg(Author)
  • 2013(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  In this example, when there are fewer than 4 workers, the marginal product exceeds the average product, so the average product is rising. When there are more than 4 workers, marginal product is less than average product, so average product is falling. Total product ( TP ) The quantity of output produced by the firm in a given amount of time. Total product depends on the quantity of labor the firm hires. Short-run production function The function that associates to each quantity of labor its total product. © Cengage Learning 136 CHAPTER 6 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Exercise 6.1 Make sure that all the marginal products have been computed correctly. The average product of labor ( APL ) is the number of dresses divided by the number of workers. Because the number of dresses is the same thing as the total product, we can write: APL ¼ TP = L where L (which stands for labor) is the total number of workers employed. For example, when 4 workers produce 28 dresses, the average product of labor is 7 dresses per worker. In Exhibit 6.1, the average product of labor is computed in the last column of the chart and graphed in the right-hand graph. Exercise 6.2 Check that all the average products have been computed correctly. Dangerous Curve Total product is measured in dresses , but marginal and average products are measured in dresses per worker. Thus the marginal and average products must be plotted on a separate graph from total product. The total product and marginal product curves are related: Marginal product gives the slope of total product.

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  Practicals in Agricultural Economics

  • Sharma, Pawan Kumar(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  This can be displayed in a chart that lists the output level corresponding to various levels of input. The diagram shows a typical total product curve. In this example, output increases as more inputs are employed up until point A (Fig. 2a). The maximum output possible with this production process is 30. If there are other inputs used in the process, they are assumed to be fixed. Total Average Product Curve The average physical product is the total production divided by the number of units of variable input employed. It is the output of each unit of input. The average product varies as more of the input is employed. Average physical product curve is plotted in Fig. 2b based on the data obtained from the schedule. Marginal Physical Product Curve The marginal physical product of a variable input is the change in total output due to a one unit change in the variable input. The marginal physical product curve is plotted in Fig. 2c based on the data obtained from the production schedule. This ebook is exclusively for this university only. Cannot be resold/distributed. Fig. 2a: Plot of Total Product Curve Fig. 2b: Plot of Average Product Curve This ebook is exclusively for this university only. Cannot be resold/distributed. Fig. 2c: Plot of Marginal Product Curve Experiment – 3 3 Objective: To study the “Law of Diminishing Returns” and demarcation of 3 stages of production. (Using Production data from Exp. 2). The Principle The principle of Diminishing returns is used under the conditions where resources are available in abundance. The principle states that ”as more investment in an area is made, overall return on that investment increases at a declining rate, as- suming that all variables remain fixed”. If one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a cer- tain point e.g.

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  Microeconomics

  Principles and Policy

  • William Baumol, Alan Blinder(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Thus, we will study the effects of variation in the quantity of one input under the assump-tion that all other things remain unchanged—that is, other things being equal. 7-2a Total, Average, and Marginal Physical Products We begin the analysis with the first of the firm’s three main questions: What is the rela-tionship between the quantity of inputs utilized and the quantity of production? Al has studied how many of its inexpensive standardized garages his firm can turn out in a year, depending on the number of carpenters it uses. The relevant data are displayed in Table 1. The table begins by confirming the commonsense observation that garages cannot be built without labor. Thus, output is zero when Al hires zero labor input (see the first line of the table). After that, the table shows the rising total garage outputs that additional amounts of labor yield, assuming that the firm’s employees work on one garage at a time and, after it is finished, move on to the next garage. For instance, with a one-carpenter input, total output is four garages per year; with two carpenters helping one another and specializing in different tasks, annual output can be increased to 12 garages. After five carpenters are employed in building a garage, they begin to get in one another’s way. As a result, employment of a sixth carpenter actually reduces output from 35 to 30 garages. Total Physical Product The data in Table 1 appear graphically in Figure 2, which is called a total physical product (TPP) curve. This curve reports how many garages Al can produce with different quantities of carpenters, holding the quantities of all other inputs constant. A fixed cost is the cost of an input whose quantity does not rise when output goes up, one that the firm requires to produce any output at all. The total cost of such indivisible inputs does not change when the output changes. Any other cost of the firm’s operation is called a variable cost .

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  Managerial Economics

  Problem-Solving in a Digital World

  • Nick Wilkinson(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  In Table 6.3 the fixed factor is the amount of capital available, three machines. Given that fixed input, and the technology in use, the marginal product of the third worker starts to decline. At this point the fixed factor is becoming overutilized; the workers are beginning to get in each other’s way, maybe waiting to use one of the machines. Obviously, this effect becomes more serious as even more workers are added and marginal output continues to decline, even though total output continues to increase until seven workers are used. When an eighth worker is added the fixed factor becomes so overutilized and workers so crowded together that total output starts to fall; the marginal product now becomes negative. It must be emphasized that the word ‘eventually’ is important. The law of diminishing returns does not indicate when marginal product will begin to decline. If more of the fixed factor is used more of the variable factor may also be used in combination with it before the law takes effect, depending on the mathematical form of the production function. 6.4.4 Relationships between Total, Marginal and Average Product Some aspects of these relationships have already been examined in the previous section, but at this point a graphical illustration is helpful. This is given in Figures 6.1 and 6.2. Figure 6.1 is based on the values in Table 6.3 and thus shows the specific pattern for total output, marginal product and average product for Viking Shoes, using the cubic production function in (6.8) and (6.9). Figure 6.2 is more general. It, again, relates to a cubic form, but not to any specific values; it is shown in order to illustrate various relationships between variable input and total output, marginal product and average product. Figure 6.2 also shows the three stages of the production function, which then need to be explained.

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  Available until 25 Jan |Learn more

  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  Comparing costs and revenues makes it possible to assess the profit that a business makes. The difference between the total revenue and the total cost of producing a given level of output is the profit.

  A marginal approach to profit maximization

  • Marginal costing looks at how additional output contributes to fixed costs and profits.

  Review questions

  1. Define the terms fixed cost, variable cost, contribution and break-even.
  2. How can break-even be calculated from contribution?
  3. Explain why the average cost curve has its characteristic U-shape.
  4. When and why do diminishing returns set in when more of a variable factor is added to a fixed factor?
  5. What happens to the following costs as output increases: (a) total cost; (b) average cost; and (c) marginal cost?
  6. What is the relationship between average and marginal revenue? Show how average and marginal revenue can be illustrated on the same graph.
  7. What is the relationship between marginal revenue and marginal cost? How can the profit maximizing point be identified by comparing marginal cost with marginal revenue?
  8. Draw a diagram to illustrate the profit maximizing point – by combining average cost, average revenue, marginal cost and marginal revenue on the same illustration.
  9. What business decisions can be informed by a process of marginal costing?
  10. How can a firm increase its profit from producing a given level of output?

  Recommended Reading

  Dransfield, R. (2004) Accounts Made Easy, Chapter 5, Cheltenham, Nelson Thornes.

  Useful Websites http://www.globusz.com/ebooks/costing/00000012.htm

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  Microeconomic Theory

  Basic Principles and Extensions

  • Walter Nicholson, Christopher Snyder(Authors)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Two different unit cost measures are widely used in eco-nomics: (1) average cost, which is the cost per unit of output and (2) marginal cost, which is the cost of one more unit of output. D E F I N I T I O N Average and marginal cost functions. The average cost function ( AC ) is found by computing total costs per unit of output: a verage cost 5 AC 1 v , w , q 2 5 C 1 v , w , q 2 q . (10.17) The marginal cost function ( MC ) is found by computing the change in total costs for a change in output produced: m arginal cost 5 MC 1 v , w , q 2 5 ∂ C 1 v , w , q 2 ∂ q . (10.18) Notice that in these definitions, average and marginal costs depend both on the level of out-put being produced and on the prices of inputs. In many places throughout this book, we will graph simple two-dimensional relationships between costs and output. As the definitions make clear, all such graphs are drawn on the assumption that the prices of inputs remain con-stant and that technology does not change. If input prices change or if technology advances, cost curves generally will shift to new positions. Later in this chapter, we will explore the likely direction and size of such shifts when we study the entire cost function in detail. 10.4.2 Graphical analysis of total costs Figures 10.4a and 10.5a illustrate two possible shapes for the relationship between total cost and the level of the firm’s output. In Figure 10.4a, total cost is simply proportional to output. Such a situation would arise if the underlying production function exhibits con-stant returns to scale. In that case, suppose k 1 units of capital input and l 1 units of labor input are required to produce one unit of output. Then C 1 v , w , 1 2 5 vk 1 1 wl 1 . (10.19) To produce m units of output, mk 1 units of capital and ml 1 units of labor are required because of the constant returns-to-scale assumption.

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  eBook - ePub

  Pricing and Equilibrium

  • Erich Schneider(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  As is obvious—and will be shown in detail later on—the ratio of the price of the variable factor to its marginal product gives the marginal costs due to a partial factor variation. If the price of the factor remains constant, marginal costs will diminish, increase or remain constant according to whether partial marginal product diminishes, increases, or remains constant.

  2. From the total product curve one may infer directly the behaviour of the average product. Average product is given by the quotient or, geometrically, by the tan of angle α in Fig. 83 . To construct the average product curve we need merely ascertain how the angle α changes as v 1 grows. Figure 84 (85) shows the curves of total and average product for the case in which marginal product rises at first, (or, in Fig. 85 , is constant at first) and then declines.

  3. The fact observed in agriculture, that with partial factor variation the marginal product diminishes after a certain point has been termed the “law of diminishing returns ”. But it must be stressed that this refers to a purely empirical regularity the validity of which can of course only be empirically established.

  Similarly, the next section will make it apparent that if partial factor variation takes place in industrial production, the marginal product may diminish (and marginal costs increase, with given factor prices) from a particular point onwards. But in the field of industrial production one can equally well point to constant marginal product over the entire range of variation of a factor.

  The returns function in the case when factors vary partially can have different forms according to the type of the productive process, that is, according to the type of the production function . A precise study of the technical characteristics of a particular process of production is alone capable of yielding information about the behaviour of the returns function in any concrete instance. In this context —and this is often overlooked —one must carefully distinguish between returns functions for variation in the scale of process on the one hand, and returns functions for partial factor variations on the other hand .

  c. The Minimum Cost Combination

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  Agricultural Product Prices

  • William G. Tomek, Harry M. Kaiser(Authors)
  • 2014(Publication Date)
  • Cornell University Press

    (Publisher)

  Figure 4-1 . These curves are based not only on fixed input prices but also on the assumption of a given technology—a given production function—for a given (optimal) plant size. In other words, these variables are held constant in deriving a supply schedule. As previously suggested, the rates of change of the marginal and average costs functions are related to the form of the underlying production function (input-output relationship). The upward slope of the marginal cost curve assumes that diminishing returns occur as additional units of the input are used. For example, increasing the level of fertilizer increases yield, but probably at a diminishing rate, and ultimately yields can decline if “too much” fertilizer is used.

  It should be noted, as an aside, that the behavior of marginal costs can vary with the type of output under analysis. For example, if the output is the service of storing a commodity, marginal costs might plausibly be a fixed, constant amount over a considerable range of storage; as long as storage capacity exists, the addition of another unit of commodity to the inventory may not result in a larger marginal cost. Diminishing returns are probably not perceptible over a broad range of the storage function.

  For our purposes, however, the point to emphasize is that given the common assumption of rising marginal costs, the optimal output varies as the price of the product rises or falls (Figure 4-1 ). The price of A equals marginal revenue, assuming firms in a competitive industry (see Chapter 5), and the optimal output of the firm depends on the intersection of this price with marginal costs. If, for instance, the output amount is at a marginal cost that is less than marginal revenue, then an increase in output would result in an incremental increase in revenue that is larger than the incremental increase in cost.

  Figure 4-1. Cost curves and optimum output at alternative prices

  The average total and average variable cost curves are also important in understanding supply response. Variable costs are those that change with the quantity produced and can be avoided by ceasing production. Total costs combine variable and fixed costs (those costs that do not vary with output). Thus, the average total cost function lies above the average variable cost function (Figure 4-1

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