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December 3, 2021 

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INFLATION PREMIUM: The difference between the nominal interest rate and the real interest rate. The role of the inflation premium is, quite simply, to adjust the interest rate for inflation. The nominal interest rate (the one on the loan contract) includes a real interest rate needed by the lender and a surcharge equal to the expected inflation rate used to maintain the purchasing power of the future payments. This expected inflation rate is the inflation premium.

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AVERAGE-MARGINAL RELATION:

A mathematical connection between a marginal value and the corresponding average value stating that the change in the average value depends on a comparison between the average and the marginal. This mathematical relation between average and marginal surfaces throughout the study of economics, especially production (average product and marginal product), cost (average total cost and marginal cost), and revenue (average revenue and marginal revenue). A similar relation is that between a total value and the corresponding marginal value.
The mathematical relation between average and marginal means that the average value is "driven" by the marginal value.
  • 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.
The reason for this relation is that average value is based on the existing situation that is then modified by the marginal value. This average-marginal relation applies to average and marginal product, average and marginal cost, average and marginal revenue, and well, any other average and marginal encountered in the study of economics.

To illustrate the basic nature of the average-marginal relation consider an example. Suppose that there is a room containing five people that have been painstakingly and accurately measured for height. The average height of this group is 66 inches (5' 6"). Some are taller than 5' 6" and some are shorter, but the average is 5' 6".

What happens to this 5' 6" average should a sixth person enter the room? This surely depends on the height of this extra person, this marginal addition to this group, does it not?

  • If this "marginal" person is 6' tall, then the group's average rises to exactly 5' 7". The marginal is greater than the average, and the average rises.

  • If the marginal sixth person is, however, a mere 5' tall, the marginal is less than the average, then the average declines to 5' 5".

  • And if the new, marginal person, is exactly 5' 6'', the same as the existing average, then the average does not change.
Average and Marginal Product
Product Curves
This average-marginal relation can be graphically illustrated, using the average product and marginal product curves displayed to the right. A comparison between average product and marginal product reveals three alternatives.
  • When the marginal measure is greater than the average measure (that is, the marginal product curve lies above the average product curve), then the average measure increases (and the average product curve has a positive slope).

  • Alternatively, when the marginal measure is less than the average measure (that is, the marginal product curve lies below the average product curve), then the average measure decreases (and the average product curve has a negative slope).

  • In addition, when the marginal measure is equal to the average measure (that is, the marginal product curve intersects the average product curve), then the average measure does not change (and the average product curve has a zero slope).

<= AVERAGE FIXED COST CURVEAVERAGE PHYSICAL PRODUCT =>


Recommended Citation:

AVERAGE-MARGINAL RELATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: December 3, 2021].


Check Out These Related Terms...

     | average product and marginal product | average product | marginal product | average product curve | marginal product curve | production stages | total-marginal relation |


Or For A Little Background...

     | marginal product | average product | marginal cost | marginal revenue | slope |


And For Further Study...

     | production possibilities | short-run production analysis | long-run production analysis | consumer demand theory | law of diminishing marginal returns | law of diminishing marginal utility | law of increasing opportunity cost | U-shaped cost curves |


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