Why MP curve is greater than or less than AP curve when AP curve is rising or falling.
This talks about the relationship between marginal product and average product. When we say that the marginal product is higher than the average product at given level of employment, this means that the average product must increase.
On the other hand if marginal product is less than average product then the average product falls. It can also be said that the AP and MP intersect at a point where AP is maximum.
As at this point the manager is able to minimize the cost for a given output while maximizing the profits. This is further shown in figure given below:
Also read | The Least Cost Combination of Factors Isoquants.
Based on the above diagram, the following conclusions may be drawn:
- When MP>AP, AP increases
- MP intersects AP at the maximum point on the AP curve and here MP=AP
- When MP<AP, AP also falls.
All the above conclusions are based on the variations in the number of laborers. That is. with an increase in the number of labor the MP as well as the AP increase up to a point.
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However, after a certain level MP starts falling, and this point is referred to as the Law of Diminishing Returns and the falling MP, AP also starts decreasing or falling but does not turn negative like the MP.