In: Economics
Using graphs, show the relationship between production and costs, by using marginal product of labor (MPL), Average Product of labor (APL), Marginal Cost (MC), and Average Cost (AC) curves?
the relationship between production and cost.
From the above graph, we can see that as long as Average product of labour (AP), increases average total cost(AC) will fall. When average product fall, average cost increases. Thus, when average product is at it's maximum average cost (AC) will be at it's minimum. Therefore, since Average product first increases, reaches a maximum point and then diminishes, average cost first decreases, reaches it's minimum point and then increases. The shape of average product curve generates a U- shaped curve of Average cost curve.
Also we can see that, as marginal product (MP) rises, marginal cost (MC) falls, then when marginal product falls, marginal cost rises. Marginal cost reaches it's minimum point when marginal product curve is at it's maximum.
In conclusion, Average cost is inversely related to Average Product and Marginal cost is also inversely related to Marginal product.