Explain the concept of production function and with the help of diagrams show the stages of a short run production function
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Answer:
PRODUCTION STAGES:
The three stages of production are characterized by the slopes, shapes, and interrelationships of the total, marginal, and average product curves. The first stage is characterized by a positive slope of the average product curve, ending at the intersection between the average product and marginal product curves; the second stage by continues up to the point in which the marginal product becomes negative, at the peak of the total product curve; and the third stage exists over the range of in which the total product curve is negatively sloped. In Stage I, average product is positive and increasing. In Stage II, marginal product is positive, but decreasing. And in Stage III, total product is decreasing.
Short-run production by a firm typically encounters three distinct stages as a larger amounts of a variable input (especially labor) are added to a fixed input (such as capital). The first stage results from increasing average product. The second stage sets it at the peak of average product, experiencing a wide range of decreasing marginal returns, and the law of diminishing marginal returns. The third stage is then characterized by negative marginal returns and, Three Product Curves, Three Stages, Production Stages, The three stages of short-run production are readily seen with the three product curves--total product, average product, and marginal product. A set of product curves is presented in the exhibit to the right. The variable input in this example is labor.
The top panel contains the total product curve (TP). It generally rises, reaches a peak, then falls. The bottom panel contains the marginal product curve (MP) and the average product curve (AP). Both curves rise a bit for small quantities of the variable input labor, then decline. Marginal product eventually turns negative, but average product remains positive.
The three short-run production stages are conveniently labeled I, II, and III, and are separated by vertical lines extending through both panels.
Stage I:
Short-run production Stage I arises due to increasing average product. As more of the variable input is added to the fixed input, the marginal product of the variable input increases. Most importantly, marginal product is greater than average product, which causes average product to increase. This is directly illustrated by the slope of the average product curve.
Consider these observations about the shapes and slopes of the three product curves in Stage I.
The total product curve has a positive slope.
Marginal product is greater than average product. Marginal product initially increases, the decreases until it is equal to average product at the end of Stage I.
Average product is positive and the average product curve has a positive slope.
Stage II:
In Stage II, short-run production is characterized by decreasing, but positive marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input decreases. Most important of all, Stage II is driven by the law of diminishing marginal returns.
The three product curves reveal the following patterns in Stage II.
The total product curve has a decreasing positive slope. In other words, the slope becomes flatter with each additional unit of variable input.
Marginal product is positive and the marginal product curve has a negative slope. The marginal product curve intersects the horizontal quantity axis at the end of Stage II.
Average product is positive and the average product curve has a negative slope. The average product curve is at its a peak at the onset of Stage II. At this peak, average product is equal to marginal product.
Stage III:
The onset of Stage III results due to negative marginal returns. In this stage of short-run production, the law of diminishing marginal returns causes marginal product to decrease so much that it becomes negative.
Stage III production is most obvious for the marginal product curve, but is also indicated by the total product curve.
The total product curve has a negative slope. It has passed its peak and is heading down.
Marginal product is negative and the marginal product curve has a negative slope. The marginal product curve has intersected the horizontal axis and is moving down.
Average product remains positive but the average product curve has a negative slope.