When MPP is larger than APP, APP must be rising.

When MPP is less than APP, APP must be falling.

When MPP equals APP, APP must be at its maximum.
When APP > MPP, the firm must be experiencing diminishing marginal returns
[WRONG] When APP < MPP, the firm must be experiencing increasing marginal
returns to labour.
Because Diminishing returns will set in before APP reaches its maximum.

MC = ΔTVC / ΔQ
ΣMC = TVC
ΣMC + TFC = TC

Marginal physical product The extra output gained by the employment of one more unit
of the variable factor: MPP = ∆TPP/∆Qv.
Total physical product The total output of a product per period of time that is obtained
from a given amount of inputs.
Average physical product Total output (TPP) per unit of the variable factor in
question: APP = TPP/Qv.

In the case of our sandwich maker, other costs besides labour would include the
cost of the ingredients needed to make sandwiches, the cost of heating, lighting
and refrigeration, the transport costs, to name just a few. For the accountant
these costs are self-apparent or explicit costs - they would all be included in a
profit and loss balance sheet.

implicit costs - those that represent the opportunity cost of being in business.

All other costs would have to be taken into account: both explicit and implicit to
make it worth staying in business.

budget for these implicit costs and include them in any projected business plan.

Fixed costs Total costs that do not vary with the amount of output produced.
Variable costs Total costs that vary with the amount of output produced.

With decreasing returns to scale all inputs are increased; with diminishing

marginal returns, only the variable factor is increased.

A firm experiences economies of scale if costs per unit of output (i.e. average
costs - AC) fall as the scale of production increases.

Using just 2 factors: capital (K) and labour (L), the least-cost combination of the
two will be where:

The expansion path is the line on an isoquant map that traces the maximum-cost
combinations of two factors as output increases.
The price maker faces a downward-sloping demand curve

The price taker:

 The firm's demand curve is horizontal.

 Average revenue equals marginal revenue.
 The total revenue curve is an upward-sloping straight line from the origin.

The price maker:

 The firm's demand curve is downward sloping.

 Hence the average revenue curve (which is the same as the demand
curve) is downward sloping.
 As a result, marginal revenue also slopes downwards and falls at twice the
rate of average revenue.
 The price maker's total revenue curve is an arch shape starting from the
origin.
 When marginal revenue is positive, total revenue is upward sloping.
 When marginal revenue is negative, total revenue is downward sloping.
 Maximum total revenue occurs where marginal revenue equals zero.

 Diminishing marginal rate of substitution The more a person consumes of

good X and the less of good Y, the less additional Y will that person be prepared to
giveup in order to obtain an extra unit of X: i.e. ∆Y/∆Xdiminishes.
 Diminishing marginal returns When one or more factors are held fixed, there
will come a point beyond which the extra output from additional units of the
variablefactor will diminish.
 Diminishing marginal utility As more units of a good are consumed, additional
units will provide less additional satisfaction than previous units.


Isocost A line showing all the combinations of twofactors that cost the same to employ.

Isoquant A line showing all the alternative combinations of two factors that can produce a
given level of output.