Why does the Average Physical Product curve slope downwards?
The Average Physical Product (APP) curve slopes downwards due to the principle of diminishing returns. The principle of diminishing returns states that as you increase the variable input while keeping all other inputs constant, there will be a point where the additional output generated from each unit of the variable input will start to decrease.
To understand why the APP curve slopes downwards, we need to look at the relationship between the total product (TP) and the variable input, usually represented by labor.
The APP is calculated by dividing the total product (TP) by the amount of variable input (usually labor). Mathematically, APP = TP / labor.
Initially, as we increase the amount of labor, the total product increases at an increasing rate. This means that each additional unit of labor contributes more and more to the overall output. As a result, the APP curve rises.
However, due to the principle of diminishing returns, there is a point where the marginal product (additional output generated by each additional unit of labor) starts to diminish. This occurs when either the fixed inputs (such as capital or land) become insufficient or when there are limitations in the production process.
When the marginal product diminishes, it causes the APP curve to slope downwards. This means that as more units of labor are added, the additional output generated from each unit of labor decreases. Eventually, the APP curve reaches a minimum point, indicating that each additional unit of labor contributes very little or even negatively affects output.
In summary, the Average Physical Product curve slopes downwards due to the principle of diminishing returns, which causes the marginal product of each additional unit of labor to decrease as more labor is utilized in the production process.