PRODUCTION STAGES: The three stages of production are characterized by the slope and shape of the total product

curve. The first stage is characterized by an increasingly positive slope, the second stage by a decreasingly positive slope, and the third stage by a negative slope. Because the slope of the total product curve IS marginal product, these three stages are also seen with marginal product. In Stage I, marginal product is positive and increasing. In Stage II, marginal product is positive, but decreasing. And in Stage III, marginal product is Three Stages negative. Short-run production by a firm typically encounters three distinct stages as a larger amounts of a variable input (especially labor) are added to a fixed input (such as capital). The first stage results from increasing marginal returns. The second stage sees on the onset of decreasing marginal returns, and the law of diminishing marginal returns. The third stage is then characterized by negative marginal returns.

Three Product Curves

The three stages of short-run production are readily seen with the three product curves--total product, average product, and marginal product. A set of product curves is presented in the exhibit to the right. The variable input in this example is labor. The top panel contains the total product curve (TP). It generally rises, reaches a peak, then falls. The bottom panel contains the marginal product curve (MP) and the average product curve (AP). Both curves rise a bit for small quantities of the variable input labor, then decline. Marginal product eventually turns negative, but average product remains positive. The three short-run production stages are conveniently labeled I, II, and III, and are separated by vertical lines extending through both panels.

Stage I
Short-run production Stage I arises due to increasing marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input increases. This is directly illustrated by the slope of the marginal product curve, and because marginal product IS the slope of the total product curve, increasing marginal returns is also reflected in total product. Consider these observations about the shapes and slopes of the three product curves in Stage I.

The total product curve has an increasing positive slope. In other words, the slope becomes steeper with each additional unit of variable input.

Marginal product is positive and the marginal product curve has a positive slope. The marginal product curve reaches a peak at the end of Stage I.

Average product is positive and the average product curve has a positive slope.

Stage II
In Stage II, short-run production is characterized by decreasing marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input decreases. Most important of all, Stage II is driven by the law of diminishing marginal returns. The beginning of Stage II is the onset of the law of diminishing marginal returns. The three product curves reveal the following patterns in Stage II.

The total product curve has a decreasing positive slope. In other words, the slope becomes flatter with each additional unit of variable input.

Marginal product is positive and the marginal product curve has a negative slope. The marginal product curve intersects the horizontal quantity axis at the end of Stage II.

Average product is positive and the average product curve at first has a positive slope, then it has a negative slope. The average product curve reaches a peak in the middle of Stage II. At this peak, average product is equal to marginal product.

Stage III
The onset of Stage III results due to negative marginal returns. In this stage of short-run production, the law of diminishing marginal returns causes marginal product to decrease so much that it becomes negative. Stage III production is most obvious for the marginal product curve, but is also indicated by the total product curve.

The total product curve has a negative slope. It has passed its peak and is heading down.

Marginal product is negative and the marginal product curve has a negative slope. The marginal product curve has intersected the horizontal axis and is moving down.

Average product remains positive but the average product curve has a negative slope.

Economic Production
These three distinct stages of short-run production are not equally important. Stage I, and increasing marginal returns, is a great place to visit, but most firms move through it quickly. Because each variable input is increasingly more productive, firms employ as many as they can, as quickly as they can. Stage III, with negative marginal returns, is not particularly attractive to firms. Production is less than it would be in Stage II, but the cost of production is greater due to the employment of the variable input. Not a lot of benefits are to be had with Stage III. Stage II, with decreasing but positive marginal returns, provides a range of production that is suitable to most every firm. Although marginal product declines, additional employment of the variable input does add to total production. Even though production cost rises with additional employment, there are benefits to be gained from extra production. The trick is to balance the extra cost with the extra production. As a matter of fact, because Stage II tends to be the choice of firms for short-run production, it is often referred to as the "economic region." Firms quickly move from Stage I to Stage II, and do all they can to avoid moving into Stage III. Firms can comfortably, and profitably, produce forever and ever in Stage II.