The Three Stages of Production

The three stages of production are:

• Stage 1: TP, MP, and AP all increase at an increasing rate.
• Stage 2: TP continues to increase, but at a diminishing rate. MP starts to fall, and AP peaks.
• Stage 3: MP becomes negative, and TP starts to decline.

This is because the variable factor is becoming more abundant, so each additional unit of the variable factor adds less to output.

The point where AP equals MP is significant because it is the point where the average output per unit of the variable factor is equal to the marginal output per unit of the variable factor.