Question

What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run?

Short answer

The relationship between marginal product (MP) and marginal cost (MC) is an inverse one, driven primarily by the law of diminishing returns in the short run. When the MP curve is rising, the MC curve falls, and vice versa. In the long run, the inverse relationship remains, but it is less pronounced due to the flexibility in adjusting all factors of production, which reduces the effects of diminishing returns.

Step-by-step solution

Understand the concepts of Marginal Product and Marginal Cost

Marginal product (MP) is the additional output produced when one more unit of input (usually labor) is added, keeping all other inputs constant. The marginal product curve shows the change in the additional output produced per unit of input. Marginal cost (MC) is the additional cost incurred when producing one more unit of output. Typically, the marginal cost curve is U-shaped, as costs initially decline due to specialization and division of labor, but then rise as the law of diminishing returns sets in.

Analyze the relationship between Marginal Product and Marginal Cost curves

The relationship between MP and MC can be better understood by analyzing their curves. When the MP curve is increasing, it means that the output is increasing at a faster rate, leading to decreasing costs and a downward-sloping MC curve. When the MP curve is at its maximum, we have the minimum point of the MC curve (i.e., the lowest cost per unit of output). As the MP curve starts to decline due to diminishing returns, the MC curve starts to rise, indicating that the cost of producing additional output is increasing. Thus, we have an inverse relationship between the MP and MC curves: when the MP curve is rising, the MC curve is falling, and when the MP curve is falling, the MC curve is rising.

Discuss the reason for this relationship

The relationship between MP and MC can be explained by the law of diminishing returns. In the short run, there is at least one fixed factor of production (e.g., capital). When additional units of a variable factor (e.g., labor) are added, the efficiency initially increases due to specialization and division of labor. However, as more units are added, the fixed factor(s) become limited, leading to congestion and reduced efficiency. This eventually causes diminishing returns, with each additional unit of input producing less output, increasing the marginal cost.

Compare the relationship in the short run and long run

In the short run, there are fixed factors of production, leading to the observed relationship between MP and MC. In the long run, however, all factors of production are variable, allowing firms to adjust the scale of production to minimize costs. The long-run marginal cost curve is derived from the short-run marginal cost curves of different scales of production, and it represents the lowest possible cost of producing each level of output when both labor and capital are adjusted. The inverse relationship between MP and MC still holds in the long run, but it is not as pronounced as in the short run due to the lack of fixed factors causing diminishing returns. In the long run, firms can adjust their production more flexibly, reducing the negative effects of diminishing returns. In conclusion, the relationship between the marginal product and marginal cost is inverse, meaning when one increases, the other decreases. This relationship occurs due to the law of diminishing returns in the short run. While the fundamental inverse relationship still holds true in the long run, it is less pronounced as firms can adjust all factors of production, reducing the effects of diminishing returns.