Product & Cost Curves: Definitions & Use in Production Possibility Curves

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  • 0:01 Product Curves
  • 1:47 Cost Curves
  • 3:16 Usefulness
  • 4:26 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Ever heard of having too many cooks in the kitchen? Product and cost curves demonstrate the real economics behind having too much help, too many gadgets, and not enough money to go around.

Product Curves

Let's say that you're the owner of a small restaurant and are trying to figure out how to get more food out of your tiny kitchen. You happen to have an expert chef, and you know that as long as your kitchen can cook it, your customers will buy it. As a result, you figure that if one chef is a good thing, two chefs could be an even better thing! Suddenly, your output doubles. You buy blast chillers and salamanders, anything to help them cook faster. Your output increases further.

Excitedly, you keep hiring staff and buying equipment. However, you notice that with each additional hire or purchase, you are no longer doubling your output. In fact, your staff spends more time complaining about the cramped kitchen than actually cooking, so soon your output has plummeted all the way to nothing!

Your restaurant has just been the victim of a product curve. Product curves are upside-down, bowl-shaped curves that show the relationship between additional inputs, such as labor or capital, and how much of a good is actually produced.

Product Curve
product curve

Sure, it was a big help having three cooks on staff where before you only had a chef, but afterwards everyone started bumping against each other. Likewise, having more than just a stove and a refrigerator was a big help, until you had so many appliances that you couldn't use them all at the same time. Companies of all sizes face this sort of problem, and part of the goal of increasing efficiency is to extend that initial rise for as long as possible.

Cost Curves

Of course, most restaurant owners never make it to the point that they are unable to produce anything. In fact, long before they would have run out of money! Now, imagine having to chart the costs of all of those new appliances and that big new staff. You may be selling everything that you are making, but now you have to pay for an increasingly large staff.

Think about it like this. In a kitchen, only the people who cook the food actually produce a product. The wait staff, janitors, hostess, and managers all exist to support them. However, those employees all cost money. And the more of them that are hired, the more money the restaurant has to make. All that new equipment costs money, too. Sure, a brand-new blast chiller may help you make superb sorbet, but only if you don't go bankrupt buying it.

Whereas the product curve looks like an upside down bowl, a cost curve looks like a right side-up bowl with very steep sides.

Cost Curve
cost curve

It shows the relationship between the cost of each extra input and its impact on production. This shows us how quickly costs can get away from us. If you were really savvy, you could find out the marginal cost of each new upgrade, and determine exactly where you should stop upgrading at.

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