Question

Usually the second stage of production is known as the 'economic stage of production'. Why? Give reasons in support of your answer.

Answer 1

Dear Student

In Second stage of production , short-run production is characterized by decreasing, but positive marginal returns , following the law of diminishing marginal returns . As more of the variable capital is added to the fixed capital , the marginal product of the variable capital decreases.

The three product curves in second stage follow these pattern :

• The total product curve has a decreasing but positive slope. The slope becomes flatter with each additional unit of variable capital .
• Marginal product is positive and the marginal product curve has a negative slope.
• Average product is positive and the average product curve has a negative slope. The average product curve is at its highest peak at the beginning of Stage II. At this peak, average product is equal to marginal product.

Hence , this stage is called the economic stage because after this stage there will be negative returns .

Regards .