# Marginal cost and product relationship management

### Relationship Between Marginal & Average Productivity | pdl-inc.info

Explain the relationship between marginal cost and average total cost curves. Draw the Suppose you have a job in production management. A portion of your . The Relationship Between MRP and Demand Due to the law of diminishing returns, we expect that both the marginal product and the marginal revenue product. A marginal benefit is a incremental increase in a benefit to a consumer caused by the consumption of an additional unit of good, while a.

### Marginal cost - Wikipedia

With zero workers, nothing gets produced. With one worker, the worker must fold the paper, staple it, and write the W. Doing all of these tasks by himself, our first worker is able to produce three widgets. Marginal Product Total product is simply the output that is produced by all of the employed workers.

Marginal product is the additional output that is generated by an additional worker. With a second worker, production increases by 5 and with the third worker it increases by 6.

### ECON Microeconomics

When these workers are added, the marginal product increases. What factors would cause this? As more workers are added, they are able to divide the respective tasks and specialize.

When the marginal product is increasing, the total product increases at an increasing rate. If a business is going to produce, they would not want to produce when marginal product is increasing, since by adding an additional worker the cost per unit of output would be declining.

In The Wealth of Nations, Adam Smith wrote about the advantages of the division of labor using the example of a pin maker. He pointed out that an individual not educated to the business could scarce make one pin a day and certainly not more than twenty. But the business of pin making is divided up into a number of peculiar trades and each worker specializes in that trade.

As more workers are added, the capital, i. The law of diminishing marginal returns states that as successive amounts of the variable input, i. As the marginal product begins to fall but remains positive, total product continues to increase but at a decreasing rate. As long as the marginal product of a worker is greater than the average product, computed by taking the total product divided by the number of workers, the average product will rise.

## What is the relationship between marginal product and marginal cost in the short run?

Thus the marginal product will always intersect the average product at the maximum average product. There may even come a point where adding an additional worker makes things so crowded that total product begins to fall. In this case the marginal product is negative.

In our example, adding the ninth and tenth worker yields lower output than what was produced with only eight workers. So how many workers should be employed?

We know that we would not stop in the region where marginal product is increasing and we would not produce in the region where marginal product is negative. Thus we will produce where marginal product is decreasing but positive, but without looking at the costs and the price that the output sells for, we are unable to determine how many workers to employ.

Marginal Cost and Average Total Cost- Micro 3.4

The shapes of the curves are identical. Each curve initially increases at a decreasing rate, reaches an inflection point, then increases at an increasing rate. The distance of the origin of the SRTC above the origin represents the fixed cost — the vertical distance between the curves.

This distance remains constant as the quantity produced, Q, increases. Private versus social marginal cost[ edit ] Main article: Social cost Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs.

The marginal private cost shows the cost associated to the firm in question. It is the marginal private cost that is used by business decision makers in their profit maximization goals. Marginal social cost is similar to private cost in that it includes the cost of private enterprise but also any other cost or offsetting benefit to society to parties having no direct association with purchase or sale of the product.

It incorporates all negative and positive externalitiesof both production and consumption. Examples might include a social cost from air pollution affecting third parties or a social benefit from flu shots protecting others from infection.

Externalities are costs or benefits that are not borne by the parties to the economic transaction. A producer may, for example, pollute the environment, and others may bear those costs. A consumer may consume a good which produces benefits for society, such as education; because the individual does not receive all of the benefits, he may consume less than efficiency would suggest.

Alternatively, an individual may be a smoker or alcoholic and impose costs on others. In these cases, production or consumption of the good in question may differ from the optimum level. Negative externalities of production[ edit ] Negative Externalities of Production Much of the time, private and social costs do not diverge from one another, but at times social costs may be either greater or less than private costs.

When marginal social costs of production are greater than that of the private cost function, we see the occurrence of a negative externality of production.

Productive processes that result in pollution are a textbook example of production that creates negative externalities. Such externalities are a result of firms externalizing their costs onto a third party in order to reduce their own total cost. As a result of externalizing such costs, we see that members of society will be negatively affected by such behavior of the firm. In this case, we see that an increased cost of production in society creates a social cost curve that depicts a greater cost than the private cost curve.

In an equilibrium state, we see that markets creating negative externalities of production will overproduce that good. As a result, the socially optimal production level would be lower than that observed.