Three stages of production and law of diminishing return

Ibrahim IsmailMicro Economic

MA-45 (Student ID 23300)Diploma in Business in Administration

Cyryx college

Question• B2. What are the key point in shot run production

function that delineate the three stages of production? Explain the relationship between the law of diminishing return and three stages of production.

Content• Production stages• Three Product Curves• Stage I• Stage II• Stage III• Law of diminishing return and three stages

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.

Three Product Curves

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• 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 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.

Law of Diminishing return and Three Stages• These three distinct stages of short-run production

are not equally important. Stage I, and with largely increasing marginal returns, is a great place to visit, but most firms move through it quickly. Because each variable input is increasingly more productive, firms employ as many as they can, as quickly as they can. Stage III, with negative marginal returns, is not particularly attractive to firms. Production is less than it would be in Stage II, but the cost of production is greater due to the employment of the variable input. Not a lot of benefits are to be had with Stage III.

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Law of Diminishing return and Three Stages

Reference• http://www.amosweb.com/cgibin/awb_nav.pl?

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