What happens to average product when marginal product is less than average product?

Leibniz 3.1.2

For an introduction to the Leibniz series, please see ‘Introducing the Leibnizes’.

Alexei’s production function has the property of diminishing marginal productivity. We can see it graphically: the graph gets flatter as the hours of study per day increase. What does this mean for the mathematical properties of the production function?

If the production function is , the marginal product of labour is , so the marginal product of labour diminishes as increases if:

or equivalently:

That is, the second derivative of the production function is negative.

An example

Consider again the production function:

where and are constants such that and . We showed in Leibniz 3.1.1 that, for this production function

which is positive as long as the hours of study are positive. What we want to show next is that as hours increase, this marginal product becomes smaller and smaller.

One way to see it is to focus on the expression

is raised to the power , which is negative, because . Recall from the property of negative exponents that as increases, decreases, and since and are positive, so does , the marginal product of labour.

Alternatively we can show that the marginal product is decreasing by differentiating it:

When is positive, we know that is positive too. Then when , , and so:

This is what we wanted to show: the second derivative of the production function is negative, so the marginal product falls as increases. In other words, the marginal product of labour is diminishing.

In Leibniz 3.1.1 we showed that when , the marginal product is less than the average product. This property is closely related to the concept of diminishing marginal product: if the marginal product of a production function is diminishing for all values of the input, then it is also true that the marginal product is less than the average product (MPL <</p><p>Figure 2 shows the graph of the production function <script type="math/tex">y = Ah^\alpha for the case where and , together with the graph of the marginal product of labour. For each value of , the upper graph shows the value of , and the lower graph shows the slope of the production function, . You can see that the marginal product of labour decreases with .

What happens to average product when marginal product is less than average product?

Fullscreen

Figure 2 The production function y = 30h0.4 and the corresponding marginal product.

Read more: Sections 6.4 and 8.4 of Pemberton and Rau (2016).

Video transcript

- [Instructor] In previous videos, we introduced the idea of a production function that takes in a bunch of inputs. Let's call this input one, input two, input three. And that based on how much of these various inputs you have, your production function can give you your output. In this video, we're going to constrain all of the inputs but one, to really take it down to how does our output vary as a function of one input. And as we do that, we're going be able to understand these ideas of total product, marginal product, and average product. So, to give you a tangible example, let's say that we are running an ice cream factory and we care about how much our ice cream production per day varies as a function of the number of people working in the factory. So, let me write this down. So, per day ice cream, ice cream production, production. And so, let me make a table here. So, in our first column, I am going to put our labor, which you could view as the input that we're going to see how does that drive output. So, I will put Labor. So, you could view this as workers per day. Workers. And we're going to see how our output varies whether we have zero workers, one worker per day, two workers per day, or three workers per day. Now, our next column would just be our output, and we'll say that's our total product as a function of labor. TP standing for total product. And let's say that we know, if we have zero people working in our ice cream factory, well then, we're going to produce zero gallons of ice cream, and let's just assume that our output is in gallons, and it's gallons per day. If we have one worker at our factory, well then, we're going to be able to produce 10 gallons a day. If we have two workers in our factory, we're going to produce 18 gallons a day. And if we have three workers in our factory, let's say we can produce 24 gallons a day. Fair enough. Now, I'm going to introduce an idea, and you've seen this word marginal, perhaps, in other times in your life. I'm going to introduce marginal product of labor. And the way to think about marginal, that's how much for every increment of one thing, how much more of the other thing do you get? So here, our marginal product of labor says, for each incremental unit of labor, for each incremental person working there per day, how many more gallons of ice cream am I producing? So, my marginal product of labor, when I go from zero to one worker, I'm able to produce 10 more gallons from that first worker. Now, what about when I go from one worker to two workers? Well then, I go from 10 to 18 gallons. So, that second person gets me an incremental eight gallons per day. And then as I go from two people working there to three people working there, well, my total product goes up by six. So, my marginal product of labor for that third worker is going to be six. Now, there's something interesting that you're immediately seeing here, and this is actually pretty typical, is that your marginal product of labor will oftentimes go down the more and more people that you add. And you might say, why is that the case? Well, they're just not gonna be quite as productive. That second person might be waiting while the first person is using the mixer and that third person is gonna be waiting while the first person and the second person, maybe they're using the restroom or something and the third person has to go. And you can imagine, you add four, five, six, at some point, you're not even be able to fit people into the factory, and so you're going to have what's known as a diminishing marginal return, and you see that right over here. As you're adding more and more labor, your marginal return is getting smaller and smaller, so this is a diminishing marginal return. Now, the last concept I'm going to introduce you to in this video is that of average product, and this is average product as a function of labor. So, AP for average product. And all that is, is our total product divided by our labor. So over here, when we have one worker, our total product is 10 gallons, and we're going to divide that by one worker. So, our average product per worker is going to be 10 gallons. Now, when we have two people working per day and we're producing 18 gallons per day, our average product as a function of labor is gonna be 18 divided by two, which is gonna be nine gallons per worker per day on average. And then in this last situation, it's going to be 24 divided by three, which is eight gallons per worker per day on average. And you can see this visually as well. I can draw this on a curve. Let me do that. So, if on our horizontal axis, I have our labor units, which is workers per day, so one, two, and three. So, this is labor right over here. In our vertical axis, I'll have our total output. So, total product, I could say. So let's say that's 10, 20. Let's say that is 30 right over there. Well, this first one right over here, when we have one person working in the factory, we produce 10 gallons per day. And this is total product right over here. When we have two people working in our factory, we produce 18 gallons a day. So, it's gonna be just like that. And notice, the slope has gone down a little bit. We have a certain slope here, but it's a little less steep there. And that steepness of that line or of that curve, that tells you about the marginal product. So, it's a little bit less steep, so our marginal product of labor has gone down a little bit. We're having diminishing marginal returns. And then last but not least, when we have three people working, we're able to produce 24, so three and 24 might be right over there. And once again, we can see our diminishing returns gets even a little bit flatter. We go from zero to one, we added plus 10, and you can see that there in the marginal product of labor. And then as we add one more person, it goes plus eight. And then we add another person, it guess plus six. So in general, if you see total product as a function of labor, or total output as a function of labor, and the curve is getting less and less and less steep, well, that tells you that your marginal product is going lower and lower and you're getting diminishing marginal returns.

What happens to the average product when the marginal product is below the average product?

When marginal product is above average product, average product is rising. When marginal product is below average product, average product is falling.

What happens if average product is greater than marginal product?

If the value of marginal product exceeds the average product it means that the average product will increase. On the contrary if the value of marginal product is less than the average product it means that the average product will decline. When the two are equal the will be no change in the average product of the firm.

What happens to marginal product when average product is less than marginal product?

If the average product falls or declines, it will also decline the marginal product. Still, the marginal product will always be less than the average product, and the marginal product will be negative or zero.

When marginal product is less than average product average product falls?

As marginal product goes on increasing, the average product is also rising, but less than marginal product. Then marginal product starts declining, but average product reaches maximum. After this point, average product starts falling, when marginal product is already declining, and becomes less than average product.