Answer to Question #156483 in Microeconomics for Aamir

Question

Explain the relationship between the cost and the productivity of the firm, i.e. how are the curves of total productivity, average productivity, and marginal productivity related to the curves of total cost, average cost, average variable cost, and marginal cost?

Answer 1

Precisely, short-run production influences short-run cost structure and behaviour. Thus, the nature and behaviour of short-run product functions influences the shape of short-run cost structure. All short-run product functions are affected by the law of variable proportions hence, short-run cost curves are also affected by the same principle through corresponding product functions. Total product curve influences total cost curve, the average product affect average cost, and marginal product affect marginal cost.

The total physical product curve first increases at an increasing rate due to increasing marginal returns, followed by an increase at a decreasing rate due to diminishing marginal returns then, it reaches maximum, and finally declines due to negative returns.

Correspondingly, the total cost curve starts by increasing at a falling rate due to increasing marginal returns, followed by increasing at a falling rate due to diminishing marginal returns. This is because high productivity reduces costs, and falling productivity increases costs. Thus, the behaviour of total product curve affect the the total cost behaviour.

Likewise, marginal product and average product curves are $\cap-$ shaped due to the principle of diminishing marginal returns. On the other note, marginal cost curves and average cost curves are $\cup -$ shaped due to the same principle. When marginal product and average product curves are increasing due to increasing marginal returns, marginal cost and average cost curves respond by falling. When marginal product and average product curves reach their maxima, marginal cost and average cost approach their minima.Finally, when diniminishing marginal returns set in, marginal product and average product decrease, inducing marginal cost and average cost to increase.

Thus, short-run production influences short-run cost structure and behaviour.