How does marginal cost generally change with quantity?

1 Answer
Mar 15, 2016

Marginal cost first decrease reached minima (most efficient point) then increase with an increase in output or quantity. Look at the MC red curve shape...

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Here is why? As you begin production, 1 unit of labor mixed with however much available capital is less productive than, say, 2 units of labor with the same capital. At very low levels of production, you've not yet reached that sweet-spot where labor and capital are at their highest productive efficiency. But as you increase productivity the cost of making an extra unit of output decreases. Now as you go past the sweet spot (for example constrained by the capacity of a single factory), then the efficiency start to drop again causing the MC of producing one unit to be higher that the sweet minima. Best way to think of this is now you have to capitalize a second factory, hire more people, higher more management etc...