Q.Explain, with the help of a diagram, the relation between average and marginal product. Or Explain the concepts of internal and external economies arising out of large scale production.

MP lies above AP while AP is rising, equals AP at AP's peak, and falls below it afterwards; internal economies are firm-specific, external economies benefit the whole industry.

Relation between AP and MP (described with reference to the usual diagram). Picture output (AP and MP) on the vertical axis and units of the variable factor (e.g., labour) on the horizontal axis. Both curves first rise, reach a maximum, and then fall, reflecting the law of variable proportions, but their relationship follows a strict rule:

• While MP > AP, AP is rising. Each additional unit of the variable factor adds more to output than the existing average, so it pulls the average up.
• MP = AP at the point where AP is at its maximum. The two curves intersect exactly at AP's peak.
• Once MP < AP, AP starts falling. Additional units now add less to output than the existing average, dragging the average down.
• The MP curve rises and falls faster than AP, reaching its own maximum earlier, and can even turn negative (if total product starts falling) while AP, built on the cumulative total, stays positive and only gradually declines — so the MP curve always cuts the AP curve from above, at AP's maximum.

Or — internal and external economies of scale.

• Internal economies are cost advantages that accrue to a single firm purely because of the growth in its OWN scale of output, independent of what other firms do — e.g., technical economies (better/specialised machinery), managerial economies (division of managerial work), financial economies (easier/cheaper access to credit), and marketing/bulk-buying economies. …