7.7 : Marginal Cost II

The marginal cost (MC) curve typically exhibits a U-shaped pattern, reflecting the relationship between marginal cost and production level. Initially, as production increases, marginal cost declines, reaching a minimum point. Beyond this point, as production continues to expand, marginal cost starts to rise again. This shape is created by the firm's transition from increasing returns to decreasing returns.

For instance, consider a scenario where a firm produces bicycles. Initially, as the firm increases its bicycle production from 1 to 3 units, the marginal cost decreases due to increasing marginal returns. However, beyond a certain production level (e.g., three units), the firm may experience decreasing marginal returns, causing marginal costs to rise.

Graphically, the MC curve initially slopes downward, indicating marginal cost is falling as production increases. This is the range of output where the firm is enjoying increasing marginal returns. For example, an increase in production can become more efficient if it allows for greater labor specialization in specific production tasks.

However, as output continues to increase, the MC eventually reaches a minimum point and slopes upward, signifying that marginal cost eventually rises as production increases. This is the range of output where the firm is forced to bear decreasing marginal returns. For example, at some level of production, the firm may face raw materials scarcity or production bottlenecks.

In summary, the U-shaped marginal cost curve reflects the firm's transition from increasing returns to decreasing returns as production levels change.