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Why is the marginal cost curve in the short-run u-shaped?

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collegeiskill... | Student, College Freshman | eNotes Newbie

Posted April 10, 2011 at 11:14 AM via web

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Why is the marginal cost curve in the short-run u-shaped?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 10, 2011 at 11:58 AM (Answer #1)

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The basic reason for this is the fact that, after a certain point, returns tend to diminish as output goes up.  This is called the law of diminishing returns.

At first, marginal costs tend to go down as production increases.  This is typically because of specialization in the labor force.  For example, if you have 1 person making shirts, they have to do the whole job.  But then if you add another person, one can cut and the other can sew.  If you add another, one can cut sleeves, another cuts the body, and the third sews.  In this way, you actually reduce your marginal costs as you add output.

At some point, however, the law of diminishing returns sets in.  Once you have the right number of workers, making more shirts ends up costing you more because you have to pay overtime, for example.  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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