Page 3 - Lesson notes-Production Function(38)

4. Explanation of Each Phase
Phase I: Phase of increasing return or Increasing Return to factor
(a) It is called the stage of increasing returns.
(b) The total product increases at an increasing rate (convex shape) up to point P. The
marginal physical product of labour (MP) is increasing and reaches its highest point Pp
vertically downwards to point P.
(c) Point P is called the point of inflexion. At point P, the curvature of the TPP curve
changes. It stops increasing at an increasing rate and starts to increase at a diminishing
rate.
In the first stage, firm is moving towards achievement of ideal combination of factors in
which TP is increasing at an increasing rate at every level of output. So, instead of
stopping its production, the firm will rather continue employing additional units of a
variable factor.
Phase II: Stage of Diminishing Returns or Diminishing Return to factor
(a) The total product (TP) continues to increase, but at a diminishing rate (concave
shape) and eventually becomes the highest.
(b) MP is diminishing but is positive.
(c) The stage comes to an end, when Marginal Product (MP) = 0 and Total Product (TP)
is maximum and constant.
The firm would like to operate in the second phase because TP is maximum and there
is proper utilization of fixed factor.
Phase III: Phase of Negative returns or Negative Return to factor