In my economics book it says this economic concept.
''Of course,all this is common sense. As marginal physical product rises - or, to put it differently, as the productivity of a variable input rises- we would expect costs to decline. And as the productivity of the variable input declines, we would expect cost to rise". CAN SOMEONE PLEASE EXPLAIN THIS IN LAYMAN TERMS?
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Okay, let's say you own a company and you are working by yourself. You make T-shirts. You've got way too much work to do and so you start to hire.
Let's say you hire your first worker and pay them $10 per hour. And let's say they produce 20 extra T-shirts. So your average cost is $.50 for each T-shirt.
So now you hire another person and that really makes your work efficient. You pay them $10 and they produce 40 extra T-shirts. Now you're paying $20 total for 60 T-shirts and your average cost is $.33 per t-shirt. See -- your costs are going down.
Now you hire one more worker but there really wasn't enough for that person to do. You hired one too many. That person only contributes 10 more t-shirts. Now you have 70 t-shirts at a cost of $30 and now each shirt is costin you $.43. So your costs have gone up.
So as you hired, first your productivity went up. More shirts were getting made per hire. And your average costs went down. Then you hired too many and they stopped being so productive.
The way I often teach this is by having students cut out paper cars. I give one student 2 scissors, a stapler, paper, and car and wheel patterns. They have to do all the steps and go slowly. Then I let one more student help. One cuts, the other staples. But imagine when I let a fourth student work. One cuts wheels, one cuts cars, one staples, and the fourth is worhtless. Do you see how that works?
Marginal physical product, also called marginal product refers to the extra quantity of a product that can be produced from increasing the the quantity of a specified factor of production or input by 1 unit, when all other factors of production or inputs are held constant.
The marginal physical product quantity at a given output level of the production can be more than, equal to, or less than the average production quantity per unit of the specified input. A marginal physical product quantity more than the average physical product quantity, reduces the overall average physical product quantity. This means that costs per unit of production will also decline.
As a matter of fact, the average total cost of production including the cost of all the inputs, and not just the cost of specified input, may fall even if marginal physical product quantity is less than average physical product quantity. This is because, although the average cost of the one variable input increases, the average cost of all the other inputs will decrease, as their quantity remains same in spite of increased production quantity. As a result increase in average cost of one input may be more than compensated by decrease in average cost of all the other inputs.
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