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#cfa-level-1 #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit #study-session-4

This image illustrates the shape of a typical input–output relationship using labor (L) as the only variable input (all other input factors are held constant). The production function has three distinct regions where both the direction of change and the rate of change in total product (TP or Q, quantity of output) vary as production changes. Regions 1 and 2 have positive changes in TP as labor is added, but the change turns negative in Region 3. Moreover, in Region 1 (L0L1), TP is increasing at an increasing rate, typically because specialization allows laborers to become increasingly productive. In Region 2, however, (L1L2), TP is increasing at a decreasing rate because capital is fixed, and labor experiences diminishing marginal returns. The firm would want to avoid Region 3 if at all possible because total product or quantity would be declining rather than increasing with additional input: There is so little capital per unit of labor that additional laborers would possibly “get in each other’s way”. Point A is where TP is maximized.
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