Question

Explain briefly the relationship between product curve (TP, AP, MP) and cost curve (TC, ATC, AVC, MC) one bye one!

Answer 1

Relationship between total product, average product, and marginal product curves.

Since the marginal product of labor is the change in the total product due to hiring an additional unit of labor. The shape of the marginal product of the labor is inverse U shape. Initially, MP increases and reaches to the maximum and after that, it decreases.

AP=TP/L

MPL=TPn-TPn-1

The diminishing marginal productivity sets in when MPL of starts decreasing

Initially when the TP curve increases with an increasing rate, then the MP curve is above the AP curve but when TP increases with a decreasing rate, then MP starts falling and it comes below the AP curve. When TP reaches at its maximum point, then MP is zero and AP continues to decline but it remains positive forever. When TP decreases, then MP becomes negative.

2.

The relationship between TC, MC, AVC and ATC are given below.

Marginal cost is the addition in total variable cost due to producing an extra unit of output. It means when an additional unit of output is produced and there is an addition in the total variable cost, then this additional cost is called marginal cost.

MC=TVCn-TVCn-1

The Shape of MC is U shape, it means initially MC decreases with the increase in the output, and after production of some output, the MC becomes minimum, and after this MC starts increasing.

When MC was below ATC, then ATC was declining after that MC cuts ATC at its minimum point after that ATC starts increasing. ATC is U-shaped but MC is an upward sloping U shape curve.

AVC is U shaped in the short-run because it initially decreases with the decreases in the MC when MC is less than AVC, but when MC is greater than AVC, then AVC starts rising. Hence AVC has U shape.

The total cost is sum of all MC cost.

TC=total fixed cost + total variable cost.

ATC=TC/Q

AVC=TVC/Q

AFC=TFC/Q