why does marginal cost decrease then increase
Decreasing then increasing marginal cost, reflected by a U-shaped marginal cost curve, is the result of increasing then decreasing marginal returns. In particular the decreasing marginal returns is caused by the law of diminishing marginal returns. As such, the law of diminishing marginal returns affects not only the short-run production of a firm but also the cost of short-run production. This translates into a positively-sloped supply curve for profit-maximizing competitive firms. The incurred by a in the are guided by the same principles that guide, especially the. As the marginal product of the variable input decreases, due to the law of diminishing marginal returns, a firm must hire increasingly more of the variable input to get the same increase in output. This means that the incremental cost of producing an additional unit of output increases. In other words,
causes increasing marginal cost. The marginal product and associated marginal cost of producing Wacky Willy Stuffed Amigos (those cute and cuddly armadillos and tarantulas) can illustrate this relation.
In production Stage I, with, marginal cost declines. Because each additional worker is increasingly more productive, a given quantity of output can be produced with fewer variable inputs. Consider an extreme example. Suppose that the first worker employed by The Wacky Willy Company has a marginal product of one Stuffed Amigo and is paid $5 an hour. In this case, the marginal cost of producing the first Stuffed Amigo is $5. One worker, working one hour, produces one Stuffed Amigo, and the cost is $5. Now suppose, with increasing marginal returns, that the second worker has a marginal product of 2 Stuffed Amigos, but is paid $5 per hour like the first worker. In this case, the marginal cost of producing the second Stuffed Amigo is only $2. 50. With a greater marginal product, the second worker needs to work only half-an-hour to produce one Stuffed Amigo, at a marginal cost of $2. 50.
One worker, working half-an-hour, produces one Stuffed Amigo, and the cost is $2. 50. The bottom line: With an increasing marginal product, marginal cost decreases. In production Stage II, with decreasing marginal returns, marginal cost increases. Because each additional worker is less productive, a given quantity of output needs more variable inputs. Consider what happens as The Wacky Willy Company produces enough to succumb to the law of diminishing marginal returns. Suppose that the 101st worker employed by The Wacky Willy Company has a marginal product of 10 Stuffed Amigos and again is paid $5 an hour. In this case, the marginal cost of producing the one Stuffed Amigo is $0. 50. One worker, working one-tenth of an hour, produces one Stuffed Amigo, and the cost is $0. 50. Now suppose, with decreasing marginal returns, that the 102nd worker has a marginal product of 5 Stuffed Amigos, but is also paid $5 per hour like the other workers.
In this case, the marginal cost of producing the one Stuffed Amigo is only $1. With a declining marginal product, the 102nd worker needs to work one-fifth of an hour to produce one Stuffed Amigo, at a marginal cost of $1. The bottom line in this case: With a decreasing marginal product, marginal cost increases. The prime conclusion is that the positively-sloped portion of the marginal cost curve is directly attributable to the law of diminishing marginal returns. MARGINAL COST AND LAW OF DIMINISHING MARGINAL RETURNS, AmosWEB Encyclonomic WEB*pedia, http://www. AmosWEB. com, AmosWEB LLC, 2000-2018. [Accessed: May 17, 2018]. Check Out These Related Terms. Or For A Little Background. And For Further Study. Search Again? The basic reason for this is the fact that, after a certain point, returns tend to diminish as output goes up. P This is called the law of diminishing returns. At first, marginal costs tend to go down as production increases. P This is typically because of specialization in the labor force.
P For example, if you have 1 person making shirts, they have to do the whole job. P But then if you add another person, one can cut and the other can sew. P If you add another, one can cut sleeves, another cuts the body, and the third sews. P In this way, you actually reduce your marginal costs as you add output. At some point, however, the law of diminishing returns sets in. P Once you have the right number of workers, making more shirts ends up costing you more because you have to pay overtime, for example. P This could also happen because you have to hire another person to cut sleeves but that doesn't really help much because it's the short run and the number of sewing machines is fixed and the person sewing can't really keep up with all the cut pieces coming at them. So, marginal costs will tend to go down at first as specialization helps you make more, but they will go back up as the law of diminishing returns kicks in.
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