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Essay Unit 3 - Diminishing Marginal Productivity
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This essay goes over 3 points evaluating the significance of diminishing marginal productivity in determining a firm's cost curves.
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Evaluate the significance of diminishing marginal productivity in determining a firm’s cost curves.The law of diminishing marginal productivity occurs when an increased
quantity of variable inputs is added to a fixed factor, thus resulting in an
eventual fall in marginal product. For example, if a firm only has 5 machines
and employs one worker, the firm’s marginal product will increase. The firm
can employ 4 additional workers and their marginal product is likely to
continuing rising. However, as the firm employs the 6th worker, there will not
be enough machines for each worker, and they will not be as efficient in the
short run. As the firm’s marginal product starts to fall, this is where the law of
diminishing marginal productivity occurs.
Marginal cost is the extra cost of
producing an additional unit of
production. In the diagram above,
the Marginal cost (MC) curve is
initially seen to be falling. This
occurs due to an increase in labour
productivity. As output increases,
prices fall as well, therefore the
marginal cost has fallen. At the
lowest point of the curve,
Diminishing Marginal Productivity
(DMR) sets in. The curve then starts to rise at a significant rate compared to
the other curves as marginal costs start to increase. This is the result of
decreased labour productivity. As fixed factors of production start to limit
labour productivity, this causes prices to rise and output levels to increase at a
decreasing rate. However, this only occurs in the short run. In the short run at
least one factor of production has to be fixed, but in the long run all factors of
production are variable. This means that there will be no constraint on labour
productivity as the firm can expand in order to adjust with different levels of
input. For example, in the short run a firm may not have enough factory space
to accommodate the increasing work force, but in the long run they may be
able to expand their factory therefore DMR will not set in.
Average fixed cost is the total fixed cost over the quantity of units produced.
As the total fixed cost does not vary but the quantity of units produced
increases, this causes average fixed cost to continuously decrease as shown in
the diagram. Average variable cost is the total variable cost over the quantity
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