Answer to Question #246522 in Microeconomics for sam

Question

One of the principles of production includes that in order to produce goods and services which can be sold, and generate revenue and profits, a firm must purchase or hire scarce inputs, which are its factors of production. Product curves show the relationship between these additional factors of production such as labour or capital, and how much of a good is actually produced.

Answer 1

A firm must purchase or hire scarce inputs, or factors of production, in order to produce goods and services that can be sold and generate revenue and profits. When only a few people are employed, marginal productivity is low. However, marginal productivity rises quickly as each extra worker contributes more than the previous one. Eventually marginal productivity begins to decline, in this case, with the employment of the fourth worker. With the employment of seven workers marginal product is zero, and total product is at a maximum. This means that marginal productivity is low at the extremes of output – at high and low levels.

It can be observed that, at first, the marginal returns curve increases and then decreases. The marginal returns curve cuts the average returns curve when average returns are at their peak.

With a small number of employees, output is low, a division of labor cannot be used, and workers are unable to specialize or learn new skills. However, as specialisation and efficiency improve, marginal returns rise quickly. This creates the opportunity for labour to develop skills and become more productive. Eventually, marginal returns diminish as the effects of specialisation and new skills wear off. This pattern has a considerable impact on the firm’s short-run cost curves.