Economics

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Economic Concepts

Solution-(a)

Relationship between Average & Marginal Productivity

In general, the term "marginal" refers to the extra or new unit. Marginal productivity is the added sum of output that is developed from adding an additional unit of a definite input. The term "average" postulates all units. The average productivity is the entire quantity of the product divided by all input quantity. The significant relationship is as follows that exist between the average & marginal productivity:

When marginal productivity is more than the average product, the labor average productivity can be enlarged.
When marginal productivity is less than average productivity, the labor average productivity can drop.
The marginal productivity is equal to the average productivity only when the average productivity is at a minimum (The Relationship between Marginal and Average and Economies of Scale).
Solution-(b)

Affect of Changes in Average & Marginal Productivity on the Cost of Production

In general terms, the average productivity and average cost of production have a contrary association. This relationship describes that when the average productivity is gained , it exhibits that the inputs consumed per unit of output goes down. As a result, the prices of the inputs remains constant, and the average cost of production turns down. Correspondingly, if the average productivity comes down, the average cost of production will enhance. The association between marginal productivity and marginal costs is also similar. If both the average and marginal productivity increase, then the cost of production in terms of average and marginal would decrease. However, till the time marginal productivity is positive, the total cost of production will keep on increasing with step-up in ...