ECON-200 Lecture Notes - Lecture 11: Fixed Cost, Variable Cost, Production Function

• School: Diablo Valley College
• Department: Economics
• Course: ECON-200
• Professor: Sorce

Document Summary

In all real world production systems, the law of diminishing marginal productivity operates. Specifically, marginal productivity and average productivity tend to rise initially, and after a certain stage, both start declining. Therefore, in the initial stages, the production function illustrates the concept of increasing marginal productivity. In the second stage, the production function illustrates the concept of diminishing marginal productivity each additional unit of input produces a lower increase in output than the previous unit. In the final stage, the production function illustrates the concept of negative marginal utility. That is, each additional unit of input now decreases the output. Within the context of the production function, the range that denotes diminishing marginal productivity is the most critical. The law of diminishing marginal productivity postulates that while maintaining other inputs constant, when we add more of one input alone, at some stage the additional output that we can derive from the additional unit of input starts declining.