Amount of Labor (units)
Amount of Capital (No. of Machines)
Output of Parts (Q, hundreds of parts)
Average Product (Q/L)
Marginal Product (Variation Q/ Variation L)
Based on the table 1, draw the Short-run average product (AP) curve and the Short-run marginal product (MP) curve:
To identify the three stages I am going to use the figure 2 and 3 that illustrate the relationship between Average Product, Marginal Product and Total Production from table 1 to the figures AP, MP. Labor input is measured on the horizontal axis of both figures AP, MP, identifying the three stages of production with different quantities shown as L1, L2 and L3. The total production is measured on the vertical axis of figure 2, while the average production and marginal production are measured on the vertical axis of figure 3.
As in the table 1, figure OUTPUT shows the total product (or level of output) first increasing very rapidly up to labor input at the level 6.6 the first stage is L1 and then increasing at slower rate as more labor input added. The first stage refers to the Law of increasing marginal returns, because in this point the marginal product curve is positive and increasing, so that total product increases at an increasing rate, Farnham, (2010). The total product curve becomes flatter and flatterer until it reaches a maximum output level between labor level 14 and 15 shows the third stage L3. According to Farnham, (2010) the third stage L3 refers to the Law of negative marginal returns, because the marginal product curve is negative and decreasing, so if more labor is added beyond level L3 the total amount of output, or the total product, decreases. This total product curve implies that the marginal product of labor first increases rapidly, then decreases in size, and eventually becomes negative to minus twenty one according to the table 1(-21).
We can also see at figure 3 the typical relationship between the marginal product and the average product curves. Between zero and 10 units of labor at the second stage of production L2, where the marginal product curve lies above the average product curve, which causes the average product curve to increase. Beyond L2 units of input, the marginal product curve lies below the average product curve, which causes the average product curve to decrease. Therefore, the marginal product curve must intersect the average product curve at the maximum point of the average product curve that is 130 at this point according to the table 1. The phenomenon illustrated by the second stage according to Farnham, (2010) is the Law of diminishing marginal returns or Law of diminishing marginal product, because the marginal product curve is positive, but decreasing, so that the total product is increasing at a decreasing rate.
Production, or output, use of various production inputs through something they call a production function. Output is assumed to be “a function of” – a consequence of – the use of inputs. Inputs can be either classified as variable inputs or fixed inputs. Fixed inputs are those things that contribute to production, but are assumed to be fixed in quantity during a given time period. The amount of output within a given time period then will be determined by the amount of variable inputs applied. The reason of the firm`s short-run has only one “rational” stage of production is exactly because a short-run production function involves the use of at least one fixed input at any given time, in the other hand the long-run production function can have more rational stages because all inputs are variable Farnham (2010).
All economically relevant production functions are characterized by three stages of production, although according to Kahn (1989), stage two is the only one economically rational range of production, because the total production increase but at decreasing rate, then if there is profit to made, it will be made somewhere within stage two. Conversely, at the point marking the beginning of stage two, total output per unit of variable input is at its maximum. Beyond that point, each increase of input results in smaller increments of output, however at the beginning of stage two, the cost of “variable input” per unit of output is at its minimum.
A simple example of one firm`s short-run with only one “rational” stage could be retail shop setting might be a widget shop that features a certain number of square feet of work space and certain number of products to be sold. Neither the space available nor the number of products can be added to without a long delay for construction or production, but it is possible to adjust the amount of labor on short notice by working more shifts and/or taking on some extra workers per shift. Adding extra man-hours of labor will increase the number of sales, but only within limits (stage two). After a certain point, such things as worker fatigue, increasing difficulties in supervising the large work force, scarcity of products to sale or just plain inefficiency due to overcrowding of the work space begin to take their toll. The marginal returns to each successive increment of labor input get smaller and smaller and ultimately turn negative for the business. If they could variable the size of the shop and the number of products available they might be able to achieve another”rational” stage.
Farnham, P. G. (2010) Economics for managers (2nd ed). Upper Saddle River, NJ: Pearson Education Inc., Published as Prentice Hall.
Kahn, R. 1989. The economics of the short period. New York: St. Martin's. (This is Kahn's dissertation at Cambridge, submitted Dec. 7, 1929; Dennis Robertson was one of the referees.)
Larson. B. 1991. A dilemma in ihe theory of short-run production and cost. Southern Economic Journal 58 (2): 465-74.