Question

How do specialization economies and diminishing marginal returns affect the shape of a firm’s short-run marginal cost curve?  Provide a complete explanation in support of your response.

Answer 1

Specialization can lead to economies of scale because it allows for increased output. Economic theory indicates that specialization is conducive to growth. Specialization, in economic terms, means focusing on one task rather than multiple tasks toward productive output

The marginal cost curve tends to slope downward initially as the benefits of the division of labor and gains from specialization lead to increased production efficiency and thus reduced marginal costs. Eventually, however, production will hit diminishing returns and the marginal cost curve will begin sloping upward.

One consequence of the law of diminishing returns is that producing one more unit of output will eventually cost increasingly more, due to inputs being used less and less effectively. The marginal cost curve will initially be downward sloping, representing added efficiency as production increases.

Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will be increasing at a decreasing rate.The law of diminishing returns implies that marginal cost will rise as output increases. Eventually, rising marginal cost will lead to a rise in average total cost

As such, the law of diminishing marginal returns affects not only the short-run production of a firm but also the cost of short-run production. This translates into a positively-sloped supply curve for profit-maximizing competitive firms.

The cost schedules in Table are represented graphically. . shows total fixed costs as a horizontal straight line at a figure of $. 50, because this cost is increased at all levels of output

The curves TC and TVC are parallel. The vertical distance between them is $. 50, which is TFC.

Thus, we find that as output increases the average cost decreases. This will hold good up to the point of maximum capacity of the equipment and scale used in the factory. If production is pushed beyond this level, without changing the equipment and scale, difficulties will arise.