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April 16, 2014 

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REAL GDP: The total market value, measured in constant prices, of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year. The key is that real gross domestic product is measured in constant prices, the prices for a specific base year. Real gross domestic product, also termed constant gross domestic product, adjusts gross domestic product for inflation. You might want to compare real gross domestic product with the related term nominal GDP.

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AVERAGE PRODUCT AND MARGINAL PRODUCT:

A mathematical connection between average product and marginal product stating that the change in the average product depends on a comparison between the average product and marginal product. If marginal product is less than average product, then average product declines. If marginal product is greater than average product, then average product rises. If marginal product is equal to average product, then average product does not change.
The relation between average product and marginal product is one of several that reflect the general relation between a marginal and the corresponding average. The general relation is this:
  • 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.
This general relation surfaces throughout the study of economics. It also applies to average and marginal cost, average and marginal revenue, average and marginal propensity to consume, and well, any other average and marginal encountered in economics.

Making Tacos

Average and Marginal Product
Product Curves
The graph at the right for the hourly production of Super Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno peppers) illustrates the relation between average product and marginal product.
  • Marginal Greater Than Average : For the first few quantities of variable input (workers), marginal product is rising and lies above average product. This is consistent with an increasing average product. If Waldo (proprietor of Waldo's TexMex Taco World) hires an additional worker in this early stage of production, then the marginal product (that is the extra contribution) of this worker is greater than that of the existing workers. This, as such, increases the average for all workers.

    Even after the law of diminishing marginal returns kicks in, and marginal product declines, average product continues to increase because the marginal exceeds the average.


  • Marginal Equal To Average: The point of intersection between the marginal product and average product curves is also the peak of the average product curve. If the productivity of the marginal worker is equal to the average productivity of the existing workers, then the average does not change.

  • Marginal Less Than Average: Once the marginal product curve moves below the average product curve, then the average product curve declines. As Waldo hires an additional worker in the middle of this range, the marginal product of this worker is less than that of the existing workers, which pulls down the overall average.

The Law of Diminishing Marginal Returns

This average-marginal relation for production is closely tied to the law of diminishing marginal returns. Marginal product declines with the onset of diminishing marginal returns. The "hump shape" of the marginal product curve reflects first increasing marginal returns then decreasing marginal returns.

For this reason, the "hump shape" of the average product curve is attributable, indirectly, to the law of diminishing marginal returns and the "hump shape" of the marginal product curve. Increasing marginal returns means marginal product is rising and because average product necessarily starts at zero (zero production means zero average product), marginal product lies above average product and causes it to rise, as well.

With the onset of decreasing marginal returns, marginal product declines. However, for this initial part of the marginal product decline, average product continues rising because marginal product is still greater. After marginal product falls enough to meet up and intersect average product, average product peaks. As marginal product, again guided by the law of diminishing marginal returns, continues to decline and falls below average product. This causes the decline of average product.

In essence, the average product curve plays catch-up to the marginal product curve, sort of follow the leader. At first, marginal product rises, so average product tags along like an annoying younger sibling. Then marginal product decides to fall, so average product chases after it. Because marginal product is guided by the law of diminishing marginal returns, so too is average product.

<= AVERAGE PRODUCTAVERAGE PRODUCT CURVE =>


Recommended Citation:

AVERAGE PRODUCT AND MARGINAL PRODUCT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: April 16, 2014].


Check Out These Related Terms...

     | total product and marginal product | total product and average product | production stages |


Or For A Little Background...

     | average-marginal relation | law of diminishing marginal returns | short-run production analysis | average product | marginal product | average product curve | marginal product curve | graphical analysis | marginal analysis | economic analysis |


And For Further Study...

     | total-marginal relation | production possibilities | short-run production analysis | long-run production analysis | law of diminishing marginal utility | law of increasing opportunity cost |


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