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SHORT-RUN PRODUCTION ALTERNATIVES: A firm faces three production options in the short run based on a comparison between price, average total cost, and average variable cost. If price is greater than average total cost, a firm earns an economic profit by producing the quantity that equates marginal revenue with marginal cost. If price is less than average total cost but greater than average variable cost, a firm incurs an economic loss, but produces the quantity that equates marginal revenue with marginal cost. If price is less than average variable cost, a firm shuts down production in the short run, incurring an economic loss equal to total fixed cost.

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PRODUCTION STAGES:

The three stages of production are characterized by the slopes, shapes, and interrelationships of the total, marginal, and average product curves. The first stage is characterized by a positive slope of the average product curve, ending at the intersection between the average product and marginal product curves; the second stage by continues up to the point in which the marginal product becomes negative, at the peak of the total product curve; and the third stage exists over the range of in which the total product curve is negatively sloped. In Stage I, average product is positive and increasing. In Stage II, marginal product is positive, but decreasing. And in Stage III, total product is decreasing.
Short-run production by a firm typically encounters three distinct stages as a larger amounts of a variable input (especially labor) are added to a fixed input (such as capital). The first stage results from increasing average product. The second stage sets it at the peak of average product, experiencing a wide range of decreasing marginal returns, and the law of diminishing marginal returns. The third stage is then characterized by negative marginal returns and.

Three Product Curves

Three Stages
Production Stages
The three stages of short-run production are readily seen with the three product curves--total product, average product, and marginal product. A set of product curves is presented in the exhibit to the right. The variable input in this example is labor.

The top panel contains the total product curve (TP). It generally rises, reaches a peak, then falls. The bottom panel contains the marginal product curve (MP) and the average product curve (AP). Both curves rise a bit for small quantities of the variable input labor, then decline. Marginal product eventually turns negative, but average product remains positive.

The three short-run production stages are conveniently labeled I, II, and III, and are separated by vertical lines extending through both panels.

Stage I

Short-run production Stage I arises due to increasing average product. As more of the variable input is added to the fixed input, the marginal product of the variable input increases. Most importantly, marginal product is greater than average product, which causes average product to increase. This is directly illustrated by the slope of the average product curve.

Consider these observations about the shapes and slopes of the three product curves in Stage I.

  • The total product curve has a positive slope.

  • Marginal product is greater than average product. Marginal product initially increases, the decreases until it is equal to average product at the end of Stage I.

  • Average product is positive and the average product curve has a positive slope.

Stage II

In Stage II, short-run production is characterized by decreasing, but positive marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input decreases. Most important of all, Stage II is driven by the law of diminishing marginal returns.

The three product curves reveal the following patterns in Stage II.

  • The total product curve has a decreasing positive slope. In other words, the slope becomes flatter with each additional unit of variable input.

  • Marginal product is positive and the marginal product curve has a negative slope. The marginal product curve intersects the horizontal quantity axis at the end of Stage II.

  • Average product is positive and the average product curve has a negative slope. The average product curve is at its a peak at the onset of Stage II. At this peak, average product is equal to marginal product.

Stage III

The onset of Stage III results due to negative marginal returns. In this stage of short-run production, the law of diminishing marginal returns causes marginal product to decrease so much that it becomes negative.

Stage III production is most obvious for the marginal product curve, but is also indicated by the total product curve.

  • The total product curve has a negative slope. It has passed its peak and is heading down.

  • Marginal product is negative and the marginal product curve has a negative slope. The marginal product curve has intersected the horizontal axis and is moving down.

  • Average product remains positive but the average product curve has a negative slope.

Economic Production

These three distinct stages of short-run production are not equally important. Stage I, and with largely increasing marginal returns, is a great place to visit, but most firms move through it quickly. Because each variable input is increasingly more productive, firms employ as many as they can, as quickly as they can. Stage III, with negative marginal returns, is not particularly attractive to firms. Production is less than it would be in Stage II, but the cost of production is greater due to the employment of the variable input. Not a lot of benefits are to be had with Stage III.

Stage II, with decreasing but positive marginal returns, provides a range of production that is suitable to most every firm. Although marginal product declines, additional employment of the variable input does add to total production. Even though production cost rises with additional employment, there are benefits to be gained from extra production. The trick is to balance the extra cost with the extra production.

As a matter of fact, because Stage II tends to be the choice of firms for short-run production, it is often referred to as the "economic region." Firms quickly move from Stage I to Stage II, and do all they can to avoid moving into Stage III. Firms can comfortably, and profitably, produce forever and ever in Stage II.

<= PRODUCTION POSSIBILITIES SCHEDULEPRODUCTION TECHNOLOGY, SUPPLY DETERMINANT =>


Recommended Citation:

PRODUCTION STAGES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 23, 2018].


Check Out These Related Terms...

     | marginal returns | increasing marginal returns | decreasing marginal returns | law of diminishing marginal returns | production inputs | production function | production time periods | total product | marginal product | average product |


Or For A Little Background...

     | short-run production analysis | product | production | production cost | variables | labor | capital | firm | business | marginal analysis | factors of production | microeconomics |


And For Further Study...

     | long-run production analysis | division of labor | production possibilities | law of increasing opportunity cost | total product and marginal product | average product and marginal product | total product and average product | long-run average cost |


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