Marginal Cost II

Marginal Cost is the additional cost of producing one more unit of a good.

The MC Curve is a U-shaped curve that illustrates the relationship between how production costs initially decrease due to increasing marginal returns and then increase due to diminishing marginal returns.

Consider the following hypothetical result of a footwear manufacturing company.

At first, from output levels 1 to 3, as the production increases, marginal cost decreases, forming the downward slope of the 'U.' This happens because of increasing marginal returns. It occurs when there are underutilized resources, allowing for greater efficiency in production.

However, after output level 3, as the production increases, marginal cost increases, creating the upward slope of the 'U.' This upward trend is attributed to the law of diminishing marginal returns. As more labor units are added to fixed capital, the marginal product of labor diminishes, causing marginal cost to increase at an increasing rate.