Can someone please explain the statement below? I can’t seem to understand it…
‘‘The point where AVC and MC intersect, average product is at its maximum. It is also the output level where average product and marginal product intersect.’’ -
Seems like an important topic and feel Econ is where I need to improve…
When AVC and MC intersect, AVC is at its minimum. Beyond that point, AVC starts to increase and average product starts to decrease, so that the firm will face diminishing returns.
Ooops. I was wrong. Diminishing return occurs before AVC and MC intersect. It occurs when marginal product starts to decrease.
First, think about marginal cost (MC) and average variable cost (AVC). If MC < AVC, then AVC is decreasing (if the average of a bunch of numbers is 10, adding 9 to the bunch of numbers will reduce the average); if MC > AVC, then AVC is increasing; if MC = AVC, then AVC is neither increasing nor decreasing: it’s at its minimum point.
Similarly, when marginal product (MP) > average product (AP), then AP is increasing, and when MP < AP, AP is decreasing; MP = AP at the point where AP is a maximum.
I’m still not quite certain why AP has to be a maximum where AVC and MC intersect; it would make more sense (to me) if it were a maximum where average total cost (ATC) and MC intersect (at minimum ATC). I’ll have to ponder that a bit longer. Please check to make sure that that’s not a typo on the original post.
I checked, and it says in Schweser that AP is at a maximum where AVC and MC intersect. Do you have any more insight as to why?
I’ve memorised the rules so to speak so if they come up I am okay but still don’t quite understand the logic but that is pretty much the same throughout Econ!