The Average–Marginal Relationship
We have so far examined the concept of diminishing marginal returns; but
average returns are also usually expected to diminish. If increasing
quantities of a variable factor are applied to a given quantity of fixed
factors, the average product of the variable factor will eventually
decrease. [ 14 ]
Notice that in part (ii) of Figure 7-1 , the MP curve cuts the AP curve at
the AP’s maximum point. This is not a matter of luck or the way the artist
just happened to draw the figure. Rather, it illustrates a fundamental
property of the relationship between average and marginal product
curves, one that is important to understand.
The average product curve slopes upward as long as the marginal product
curve is above it; whether the marginal product curve is itself sloping
upward or downward is irrelevant. For example, if an additional worker is
to raise the average product of all workers, that additional worker’s
output must be greater than the average output of the other workers. In
other words, in order for the average product to rise when a new worker
is added, the marginal product (the output of the new worker) must
exceed the average product. [ 15 ]
The relationship between marginal and average measures is very general.
If the marginal is greater than the average, the average must be rising; if