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AP = TP/L
Marginal Product: Is the additional product
resulting from an increase in labour by one unit.
It the change in TP per unit change in the variable
factor (labour in our case)
MP = TP/L
TP, AP and MP can either be presented in a graph
or a schedule
For example
Relationship between TP, AP and MP
Total Product increases, reaches maximum and
thereafter declines
When TP is at maximum, MP is zero (slope?), and
When TP is falling, MP is negative
MP > AP when AP is increasing (because MP drives
changes in AP)
MP < AP when AP is falling (because MP drives
changes in AP)
MP = AP when AP is at maximum
The law applies in the short run period where one factor is
variable while others fixed and state of technology is
constant.
Example
As more farm labourers are added to a given farm size, the
MP of an additional worker becomes smaller
The Three Stages of Production
K*MPK + L*MPL = 0
MRTS = -K MPL
___ = ____
L MPK
Isocost: Is the line that shows amount of input
combinations which can be purchased with a given amount
of expenditure.
P *L +P *K = C
L K
Note that the isocost line has similar characteristics with
the budget line discussed previously in terms of intercepts,
slope, parallel shifts and pivoting.
This means,
-K MPL PL
___ = ____ = ___
L MPK PK
OR
MPL MPK
____ = ____
PL PK
Therefore, point E in the following figure is equilibrium
where the optimal input combination (Least cost condition)
is attained
What is an expansion path?