Answer to Question #147350 in Economics of Enterprise for Inaya Singh

Question

62. Explain the relationship between the average product and average cost functions and between the marginal product and marginal cost functions

Answer 1

The behaviour of the marginal cost function is controlled by the marginal product function. The behaviour of marginal product is controlled by the principle of diminishing marginal returns. When marginal product increases, due to increasing marginal returns, the marginal cost curve falls. When the marginal product decreases, due to diminishing marginal returns, the marginal cost increases. When marginal product is maximum, the marginal cost is minimum.

The average product function controls the behaviour of the average cost function. When the average product function increases, the average cost decreases; when the average product function decreases, the average cost increases. When the average product reaches maximum, the average cost reaches minimum.

The behaviour of the average product is controlled by the marginal product, and so is the behaviour of the average cost by the marginal cost. Marginal product and average product are $\cap-shapped$, and the marginal cost and average cost functions are $\cup-shapped$ . This behaviour is due to the principle of diminishing marginal returns or the law of variable proportions.