• If the marginal is less than the average, then the average declines.


• If the marginal is greater than the average, then the average rises.


• If the marginal is equal to the average, then the average does not change.

Making Tacos

Average and Marginal Product

• Marginal Greater Than Average : For the first few quantities of variable input (workers), marginal product is rising and lies above average product. This is consistent with an increasing average product. If Waldo (proprietor of Waldo's TexMex Taco World) hires an additional worker in this early stage of production, then the marginal product (that is the extra contribution) of this worker is greater than that of the existing workers. This, as such, increases the average for all workers.

  Even after the law of diminishing marginal returns kicks in, and marginal product declines, average product continues to increase because the marginal exceeds the average.



• Marginal Equal To Average: The point of intersection between the marginal product and average product curves is also the peak of the average product curve. If the productivity of the marginal worker is equal to the average productivity of the existing workers, then the average does not change.


• Marginal Less Than Average: Once the marginal product curve moves below the average product curve, then the average product curve declines. As Waldo hires an additional worker in the middle of this range, the marginal product of this worker is less than that of the existing workers, which pulls down the overall average.

The Law of Diminishing Marginal Returns

For this reason, the "hump shape" of the average product curve is attributable, indirectly, to the law of diminishing marginal returns and the "hump shape" of the marginal product curve. Increasing marginal returns means marginal product is rising and because average product necessarily starts at zero (zero production means zero average product), marginal product lies above average product and causes it to rise, as well.

With the onset of decreasing marginal returns, marginal product declines. However, for this initial part of the marginal product decline, average product continues rising because marginal product is still greater. After marginal product falls enough to meet up and intersect average product, average product peaks. As marginal product, again guided by the law of diminishing marginal returns, continues to decline and falls below average product. This causes the decline of average product.