The Three Stages of Production
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precisely the value of the marginal product of labor because at that point the ray from the origin and the tangent at that point are identical. This is seen in Figure 5.2b at the labor usage 0E, where the APL curve intersects the MPL curve. Finally, unlike the marginal product of labor (or any other productive input), the average product of labor cannot be negative because labor and output can never be negative.
THE THREE STAGES OF PRODUCTION Figure 5.2 can also be used to define the three stages of production. Stage I of production is defined as the range of output from L = 0 to, but not including, the level of labor usage at which APL = MPL. Alternatively, stage I of production is defined up to the level of labor usage at which the average product of labor is maximized. In this range, labor is over utilized, whereas capital is underutilized. This can be seen by the fact that MPL > APL thus “pulling up” output per unit of labor. If we assume that the wage rate per worker and the price per unit of output are constant, then increasing output per worker suggests that average revenue generated per worker is rising, which suggests that average profit per worker is also rising. It stands to reason, therefore, that no firm would ever actually operate within this region of labor usage (0 to MPL = APL), since additions to the labor force will increase average worker productivity and, under the appropriate assumptions, average profit generated per worker as well. Stage II of production is defined in Figure 5.2 as the labor usage levels 0E to 0F. In this region, the marginal product of labor is positive but is less than the average product of labor, thus “pulling down” output per worker, which implies that average revenue generated per worker is also falling. In this region, labor becomes increasingly less productive on average. Finally, stage III of production is defined along the TPL function for labor input usage in excess of 0F, where MPL < 0. As it is apparent that production will not take place in stage I of production because an incremental increase in labor usage will result in an increase in output per worker and, under the appropriate assumptions, an increase in profit per worker, so it is also obvious that production will not take place in stage III. This is because an increase in labor usage will result in a decline in total output accompanied by an increase in total cost of production, implying a decline in profit. Stage III is also the counterpart to stage I of production. Whereas in stage I labor is overutilized and capital is underutilized, in stage III the reverse is true; that is, labor is underutilized and capital is overutilized. In other words, because of the symmetry of production, labor that is
