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Average and Marginal

http://www.raybromley.com/notes/AveMargApp.html

pcecon.com Class Notes


by Ray Bromley

Marginals of some value (product, cost, whatever) are always related to the average of that value, and vice versa. You can see this by looking at your GPA (grade point average). Your next (or marginal) grade will affect your GPA in a predictable way. Suppose your GPA starts at 3.0 Your next (marginal) grade is 4.0 Your GPA will go up when you calculate it (after adding in the marginal) The marginal pulls the average up when the marginal is bigger than the average. Suppose your GPA starts at 3.0 Your next (marginal) grade is 2.0 Your GPA will go down when you calculate it (after adding in the marginal) The marginal pulls the average down when the marginal is less than the average. This same thing applies to production and cost. In production, if the marginal product (of a particular addition of variable input) is greater than the average product, the average product will go up when that variable input is used. You can see this relationship on the following graph of marginal product and average product:

Notice that at the amount of input for which average product is maximized, marginal product is equal to average product. At input levels where marginal product is above average product, the average product is rising (the curve slopes up as more input is used). At input levels where marginal product is below average product, average product is falling (the curve slopes down).
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10/31/2012 9:05 AM

Average and Marginal

http://www.raybromley.com/notes/AveMargApp.html

With cost, if the marginal cost (of a particular unit of output) is greater than the average variable cost, the average variable cost will go up when that output is produced. You can see this relationship on the following graph of marginal cost and average variable cost:

If this graph looks like an upside down version of the marginal product/average product graph, remember that marginal cost is inversely related to marginal product, and average variable cost is inversely related to average product. At the amount of input for which average variable cost is minimized, marginal cost is equal to average variable cost. At input levels where marginal cost is above average variable cost, the average variable cost is rising (the curve slopes up as more output is produced). At input levels where marginal cost is below average variable cost, average variable cost is falling (the curve slopes down).
Copyright 2006-7 by Ray Bromley. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.

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10/31/2012 9:05 AM