ECON101 Lecture Notes - Lecture 5: Average Variable Cost, Diminishing Returns, Marginal Cost

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Diminishing returns:
When increasing quantities of variable input are employed in production, eventually
each additional unit of variable input adds less to total product/output than did the
previous unit (eventually marginal product beings and continues to decline)
Total product curve 1
Usually increases at an increasing rate due to variable input productivity gains (up
to 3 units of variable input)
TP continues to increase at a decreasing rate due to diminishing returns (between
3-7 units of variable input)
TP reaches a maximum (7 units of variable input)
After the TP reaches a maximum it begins and continues to decline (beyond 7 units
of variable input)
Average Product Curve 2
Typical average product curve
Marginal product curve (MP) 3
Relationship between marginal and average product – exam question
Graph 4
MP > AP when AP is rising (increasing)
MP = AP when AP at maximum
MP < AP when AP is declining
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