00:01
In order to figure out the relationship between marginal product and marginal cost, let's first graph these curves.
00:06
So in the top over here, i have the marginal product curve, and i have the quantity of an input on the x axis and the marginal product on the y axis.
00:18
So the reason this is the case is because marginal product represents the additional output from hiring, or the change in the total output from hiring one additional input that could be labor or capital.
00:32
So in this situation, let's just think of labor.
00:34
Okay.
00:35
So my marginal product, i will have it increase or i will have it decrease until some point.
00:42
And then at some point, things are going to become so crowded that it will start to fall again.
00:48
Okay.
00:49
So let's let's think about why this is the case.
00:52
So this is how the curve will look.
00:54
And this is the maximum right here.
00:56
Why would this be the case? suppose you have a small room.
00:59
Three people at max can fit into the small room.
01:02
When you have three people at max, things are kind of crowded.
01:04
Once you go from one person to two person, you can become more efficient.
01:08
You can produce more input, okay? but you'll produce less than the person before you because of diminishing marginal returns.
01:16
And then the next person, the third person that's hired, produces or adds less than the second person, but still increases the total output.
01:26
Now when you hire a fourth worker and start to cram people in.
01:29
Into this room, things are going to reverse.
01:32
You won't be able to fit these people and they will be less efficient than if you let them be as original.
01:38
Now, when we're talking about marginal cost and the quantity of output, if we looked at our long -run average cost curve or even our short -on -average cost curve, we always have this kind of curve where as quantity increases, we have economies of scale for a while, then we have constant returns to scale, and then we have dis -economies of scale.
01:58
And because of this, we see that over here, the minimum and maximum of the marginal cost curve and the maximum of the marginal product curve are at the same point.
02:15
So what this tells us is that, sorry, what this tells us is that these curves are inversely related...