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LAW OF DIMINISHING MARGINAL RETURNS: A principle stating that as more and more of a variable input is combined with a fixed input in short-run production, the marginal product of the variable input eventually declines. This is THE economic principle underlying the analysis of short-run production for a firm. Among a host of other things, it offers an explanation for the upward-sloping market supply curve. How does the law of diminishing marginal returns help us understand supply? The law of supply and the upward-sloping supply curve indicate that a firm needs to receive higher prices to produce and sell larger quantities. Why do they need higher prices?
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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 |  |
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).
Recommended Citation:AVERAGE-MARGINAL RELATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: February 24, 2020].
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