# Macroeconomics Theory

## Macroeconomics Theory

• Submitted By: tarasius
• Date Submitted: 09/24/2010 9:21 PM
• Words: 2313
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Short run Production Relationships
* Short run production relationships show how output varies with labour when capital is fixed.
* Total product (TP) shows total output at each level of labour input. Graphically, TP typically rises when more labour is hired. However, it is possible that as too many workers are being hired, TP can drop. This occurs when the additional workers distract or overcrowd the previously existing workers.
* Marginal product (MP) shows the extra output from adding an extra unit of labour. Graphically, MP rises quickly when more workers are hired. This occurs when workers can specialize in what they do. As more workers are hired, overcrowding and shirking will cut down on the contribution of the incremental workers. The MP curve has an inverted U-shape.
* Average product (AP) shows total output per unit of labour. The AP curve also has an inverted U-shape.
* The principle of diminishing returns states that as successive units of a variable resource (say, labour) are added to a fixed input (say, capital), at some point the marginal product MP will decline.
AP and MP functions intersect at the point where AP is at maximum. MP = AP, AP is neither increasing nor decreasing. if MP>AP, then AP , if MP<AP, then AP 
MC reaches a minimum where MP is a maximum. MP and MC inversely related
MC will increase with an increase in the wage rate or a decrease in productivity.
Diminishing marginal product refers to the relationship between changes in output and changes in one variable factor when other factors of production are being held constant. Since one or more factors are fixed in this exercise, this is a short run concept
Short run Production Costs
* In the short run, a firm’s total costs are the sum of fixed and variable costs. As output increases:
* total fixed costs (TFC) do not change;
* total variable costs (TVC) increase, at first increasing at a decreasing rate and then at an...