DIMINISHING MARGINAL RETURNS

The law of diminishing marginal returns states that as additional units of a variable input are added to a fixed input, the
marginal output (or the additional output produced by each additional unit of input) will eventually decrease. This
means that the efficiency of production decreases after a certain point, leading to diminishing returns.

Now, when it comes to the shape of the marginal cost (MC) curve, it is closely related to the law of diminishing marginal
returns. The marginal cost represents the additional cost incurred by producing one more unit of output. When
diminishing marginal returns set in, it means that each additional unit of output costs more to produce because you
need to input more resources (like labor or raw materials) to get the same increase in output. As a result, the marginal
cost curve tends to slope upward after a certain level of production.

In summary, the law of diminishing marginal returns influences the shape of the marginal cost curve by causing it to rise
as production increases beyond a certain point. This relationship highlights the economic principle that increasing
production beyond a certain level becomes progressively more expensive due to diminishing efficiency in the production
process with one fixed factorThe law of diminishing marginal returns and the shape of the marginal cost curve are
closely related concepts in economics, particularly in the context of production and cost analysis. Here's how they are
connected:
Law of Diminishing Marginal Returns: This economic principle states that as a firm increases the input of one variable
factor (like labor or capital) while keeping other factors constant, the additional output (marginal product) derived from
each additional unit of the variable input will eventually diminish. In simpler terms, as we add more of a certain input to
the production process, the additional output gained from each unit added will get smaller.
Marginal Cost Curve:
The marginal cost (MC) curve shows how the cost of producing one additional unit of output changes as the level of
production increases. It reflects the additional cost incurred when producing an extra unit.
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Initially, when a firm increases its production, it often experiences decreasing marginal cost. This means that as
production expands, the cost of producing one more unit of output is lower than the average cost, and the MC curve
slopes downward.
- This decreasing marginal cost is often associated with the additional input (e.g., labor) contributes more to total output
than the cost which is paid in hiring this additional input. Therefore, the cost of each additional unit decreases.
- However, as the firm continues to increase production beyond a certain point, it eventually encounters diminishing
marginal returns. This means that each additional unit of the variable input contributes less to output, and this is where
the MC curve starts to rise.
- The MC curve intersects the average total cost (ATC) curve at its lowest point. Before this intersection, MC is below
ATC, pulling the average cost down. After the intersection, MC is above ATC, causing the average cost to rise.

In summary, the law of diminishing marginal returns explains why the marginal cost curve typically exhibits a U-shaped
pattern. Initially, it declines due to the cost paid to factor being less than the contribution if that factor i.e. MPL > wage,
but eventually, it rises due to diminishing marginal returns i.e. the cotribution of each additinal labour is less than the
cost paid to hire it. MPL < wage, intersecting the average total cost curve and affecting a firm's cost structure as
production levels change. Graphically, on a typical production cost graph, the marginal cost curve initially slopes
downwards due to economies of scale, where increasing production leads to lower average costs. However, when
diminishing marginal returns come into play, the marginal cost curve starts to slope upwards. This is because the cost of
producing each additional unit rises as the diminishing returns set in. Therefore, the law of diminishing marginal returns
directly influences the upward-sloping nature of the marginal cost curve in the later stages of production.