inputs, outputs and costs

what is the short run

when at least one factor of production is fixed

in the short run which factor of production is usually fixed

usually capital

what is total physical product (TTP)

the total output produced

What is Average Physical Product (APP) - how do you calculate APP

Output per worker

What is Marginal Physical Product (MPP)?

The extra output from employing one more worker

What is the law of diminishing marginal returns?

As more labour is added to fixed capital, MPP eventually falls

Why do diminishing returns occur?

Fixed capital becomes overused, reducing worker productivity

What happens to MPP during increasing returns?

MPP rises (workers become more efficient)

What happens to MPP during diminishing returns?

MPP falls (workers become less productive)

What happens when MPP is negative?

Total output (TPP) falls

What is the relationship between MPP and TPP?

MPP = gradient of TPP

When is MPP positive?

When TPP is increasing

When is MPP zero?

When TPP is at its maximum

When is MPP negative?

When TPP is falling

What is the relationship between MPP and APP?

MPP intersects APP at its maximum

If MPP > APP, what happens to APP?

APP is rising

If MPP < APP, what happens to APP?

APP is falling

What is marginal cost (MC)?

The cost of producing one extra unit of output

What is the relationship between MPP and MC?

Inverse relationship

• MPP ↑ → MC ↓

• MPP ↓ → MC ↑

Why do increasing returns cause falling MC?

Workers are more productive, so each unit costs less

Why do diminishing returns cause rising MC?

Workers are less productive, so each unit costs more

What is the key link between production and costs?

Productivity determines costs
Lower productivity = higher costs