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Relation between Total, Average and Marginal Product

Relation between Total, Average and Marginal Product

So long as marginal product rises, total product increases at increasing rate.

Marginal product starts falling but remains positive, total product rises at diminishing rate.

When marginal product becomes negative, then total product starts falling.

So long as average production is less than marginal product, average production increases Marginal product intersects average product at the point where average product is maximum. After this average product starts falling and is more than marginal product in this stage.

Returns to a factor : In a short period when additional units of variablefactors are employed with fixed factors, then returns to a factor operates. Returns to a factor shows the changes in total products, of a good when only the quantity of one input is increased, while that of other inputs kept content.

Law of variable proportion : The law states that as we increase thequantity of only variable one input, keeping other inputs fixed, the total product increases at increasing rate in the beginning, then increases at decreasing rate and finally TP falls. According to this law, change in TP and MP are classify into three shares. Phase I : TP Increases at increasing rate : In the initial phase asmore and more units of variable factor are employed with fixed factor total physical production increases at increasing rate, MP increases. Phase II : TP increases at decreasing rate : As more and moreunits of variable factors are employed with fixed factors then total product increases at diminishing rate, MP decreases but is positive. At the end of this phase TP maximum and MP becomes zero. Phase III : TP falls : As more and more units of variable factorsare employed with given fixed factors, total production starts decreasing and marginal product becomes negative. Economic Cost : It is the sum of direct (explicit cost) and indirect cost(explicit cost), including Normal profit. Economic cost : Explicit cost + implicit cost + Normal Profit. Those monetary payments, which are incurred by producers for payment those of factor and non-factor inputs which are not owned by produces are called Direct Cost. It is also called explicit cost.