PRODUCTION STAGES

The three stages of production are characterized by the slopes, shapes, and interrelationships
of the total, marginal, and average product curves. The first stage is characterized by a
positive slope of the average product curve, ending at the intersection between the average
product and marginal product curves; the second stage by continues up to the point in which
the marginal product becomes negative, at the peak of the total product curve; and the third
stage exists over the range of in which the total product curve is negatively sloped. In Stage I,
average product is positive and increasing. In Stage II, marginal product is positive, but
decreasing. And in Stage III, total product is decreasing.
Short-run production by a firm typically encounters three distinct stages as larger amounts of
a variable input (especially labour) are added to affix (such as capital). The first stage results
from increasing average. The second stage sets it at the peak of average product, experiencing
a wide range of decreasing marginal returns, and the law. The third stage is then
characterized by negative marginal returns and.
Three Product Curves
The three stages of short-run production are readily
seen with the three product curves--total product,
average product, and marginal. A set of product
curves is presented in the exhibit to the right. The
variable input in this example is labour.
The top panel contains the total product curve (TP).
It generally rises, reaches a peak, and then falls.
The bottom panel contains the marginal (MP) and
the average product curve (AP). Both curves rise a
bit for small quantities of the variable input labour,
then decline. Marginal product eventually turns
negative, but average product remains positive.
The three short-run production stages are
conveniently labelled I, II, and III, and are
separated by vertical lines extending through both
panels.
Stage I
Short-run production Stage I arise due to increasing
average product. As more of the variable input is added to the fixed input, the marginal
product of the variable input increases. Most importantly, marginal product is greater than
average product, which causes average product to increase. This is directly illustrated by
the slope of the average product curve.
Consider these observations about the shapes and slopes of the three product curves in Stage
I.

Three Stages

The total product curve has a positive slope.

Marginal product is greater than average product. Marginal product initially increases,
the decreases until it is equal to average product 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, but positive 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 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 has a negative slope. The
average product curve is at its a peak at the onset 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.

Where an Optimizing Producer Undertake Production
These three distinct stages of short-run production are not equally important. Stage I, and
with largely 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.
So, we can say that Stage II is best for an organization for production.