b) Diminishing returns

b) derivation of short-run cost curves from the assumption of diminishing marginal productivity

marginal product = output produced from one additional unit of labour

law of diminishing marginal returns

• more variable input (labour) added to fixed input (capital)

• initially

  • MP increases

  • cost of additional input < revenue from additional output

  • increasing MP = decreasing MC

• up to a point

  • MP decreases

  • cost of additional input > revenue from additional output

  • decreasing MP = increasing MC