Marginal/Average Cost Curves

• Marginal cost curve


  The shape of the marginal cost curve for a firm operating in the short-run
• Average cost curve


  The shape of the average cost curve for a firm operating in the short-run
• The shape of the marginal cost curve and the average cost curve is due to the law of diminishing marginal returns
• Illustrating the law of diminishing returns

  1. Employ more workers

  2. Marginal product increases initially

  3. Marginal product starts to fall

  4. Diminishing returns set in
• Fixed costs


  10 pounds worth of fixed costs that always have to be paid regardless of the level of output being produced
• Hourly wage


  10 pounds per worker
• Average cost equation


  Total cost divided by quantity
• Marginal cost equation


  Change in total cost divided by change in quantity
• Marginal cost and average cost

  Mirror reflections of marginal product and average product
• Stages of the marginal cost curve

  1. Stage 1: Increasing labour productivity, increasing marginal product, decreasing marginal cost

  2. Stage 2: Diminishing returns, decreasing labour productivity, decreasing marginal product, increasing marginal cost
• Marginal cost is the key to illustrating the law of diminishing returns and why the cost curves are shaped the way they are