Short- Run Production Relationship

Short- Run Production Relationship

refers to the time frame in which the input of one or more productive agents is fixed.

Three Important Terms

Total Product(TP)- is the total quantity , or output, of a particular good produced.

- amount of output produced in physical units such as bags of fertilizer, bottles of vinegar or pair of shoes or slippers.

Marginal Product (MP) is the extra output or added product associated with adding a unit of a variable resource.

Marginal product = change in total

product change in

quantity of variable inputs

Average product (AP)- output per unit of resources employed.

Average= total product_____

quantity of variable inputs

SOAP MANUFACTURERNumber of workers

Total Output per day

Average product

Marginal product

1 50 bars 50 bars

2 125 62.5 75

3 220 73.3 95

4 320 80 100

5 410 82 90

6 490 81.6 80

7 560 80 70

8 610 76.2 50

9 640 71 30

10 630 63 -10

LAW OF DIMINISHING RETURNS

as we add more units of a variable input to

fixed amounts of capital, the change in total output will at first rise and then fall.

Diminishing returns to labor occurs when marginal product of labor starts to fall. This means that total output will be increasing at a decreasing rate.

Relationship between MP and AP

1.When MP lies above AP, AP rises.

2. When MP lies below AP, AP falls.

3.MP intersects AP at its maximum value

4.When MP crosses the X-axis, it

signifies a move from diminishing marginal returns to negative marginal returns.