TABLE 5.

1
Hypothetical Production Schedule of T-Shirts

The table shows the total amount of T-shirts that can be produced for different inputs of
labor when other inputs and the state of technical knowledge are held constant. From total
product, we can derive important production concepts like the marginal and average products.

GRAPHICAL PRESENTATION OF TP, MP, AND AP

FIGURE 5.3:
Total, Marginal, and Average Products

100

80

60

40

20

0
1 2 3 4 5 6 7 8 9 10 11

-20

TP MP AP

The figure shows the total, marginal, and average products. Total product increases at
a decreasing rate while marginal and average products first increase, reach their maximum
and thereafter decline.
OUTPUT AND REVENUE OF THE FIRM
Total Revenue = Price (P) x Quantity (Q)
Marginal Revenue Product (MRP) – is the change (increase) in revenue resulting from the
output produced by one additional unit (MPP) of the variable input. MRP is the additional revenue
generated by employing an additional factor input.
MRP = MPP x Price
Marginal Physical Product (MPP) – is computed as the change in the quantity of output divided
by the change in the quantity of the factor input.

TABLE 5.2
Production and Revenue Schedule of T-Shirts

The table shows the Marginal Revenue Product which helps in the marginal analysis in studying the
effects of variable inputs (Labor). As Labor increases, the revenue decreases at a certain point by each
additional unit.
THE LAW OF DIMINISHING RETURNS
The Law of Diminishing Returns – holds that we will get less and less extra output when we add
additional doses of an input while holding other inputs fixed. In other words, the marginal product
of each unit of input will decline as the amount of that input increases, holding all other inputs
constant. (Samuelson and Nordhaus 2005, p.109)
Increasing Marginal Returns – happen when the marginal product of an additional worker
exceeds the marginal product of the previous worker.
Decreasing Marginal Returns – occur when the marginal product of an additional worker is less
than the marginal product of the previous worker hired to do the same task.
RETURNS TO SCALE
a. Constant returns to scale – indicates a case where a change in all inputs leads to a
proportional change in output.
b. Increasing returns to scale – (also called economies of scale) happen when an increase in
all inputs leads to a more-than-proportional increase in the level of output.
c. Decreasing returns to scale – occur when a balanced increase in all inputs leads to a less-
than-proportional increase in total output.