Page 109 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes
Figure 8.1

Stage II
Rate of Stage I Stage III
Output
(TP) b

Point of inflection a TP L

Rate of Labour
L 1 L 2 L 3
(L)
Average
Produce Increasing Diminishing marginal Negative
+ marginal returns marginal
Marginal returns returns
Produce
AP L

Rate of Labour
L 1 L 2 L 3
(L)
MP L

8.1.1 Three Stages of Production

Diminishing returns to a factor can be graphically understood with the help of total and marginal

product curves. In Figure 8.1, the TPP curve rises first to an increasing rate in stage I and later
at a diminishing rate in stage II. At stage II, the TPP remains constant. Thus, the total output
increases more than proportionately until X units of labour are employed; between X units and Y
units of labour used, the total output rises with every additional unit of labour but this increase is
less than proportionate. If labour units increase beyond level Y, the total output eventually starts
decreasing. Correspondingly when TPP is rising at an increasing rate, MPP and APP curves
are rising; and when total product is rising at a diminishing rate, the MPP and APP curves are
declining. At Y, where TPP becomes constant, the MPP becomes zero, and additional labour
beyond Y makes MPP negative. These three phases of TPP curve are called the three stages of
production and are summarized in Table 8.2.
No firm will choose to operate either in Stage I or Stage III. In Stage I the marginal physical

product is rising, i.e., each additional unit of the variable factor is contributing to output more

than the earlier units of the factor; it is therefore profitable for the firm to keep on increasing the
use of labour. In Stage III, marginal contribution to output of each additional unit of labour is
negative; it is therefore, not advisable to use any additional labour. Even if cost of labour used is

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