Question

Explain the relationship between the marginal product of variable inputs (like labor) and the marginal costs of production. Do they affect each other, or does one cause the other? Are there possible situations where the marginal costs of production do not rise? If so, what does that mean for the marginal product of the inputs or the price of these inputs?

(approximately 1 - 3 paragraphs).

Answer 1

In , economic the marginal cost represents the total cost to produce one additional unit of product or output. Marginal product is the extra output generated by one additional unit of input, such as an additional worker. Marginal cost and marginal product are inversely related to one another: as one increases, the other will automatically decrease proportionally and vice versa.

The relationship between marginal cost and marginal product can be attributed to the law of diminishing return , a central concept in the field of economics. This law states that, as one continues to add resources or inputs to production, the cost per unit will first decline, then bottom out, and finally start to rise again. For example, a company may add a new worker to its manufacturing operations . This new employee helps the firm increase its total output and may also increase marginal product. After too many workers have been added, however, employees may find themselves wasting time waiting to use tools and equipment, or simply crowding one another out, resulting in a higher marginal cost.

Marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are fixed and thus have no marginal cost.

The marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile but not the fixed costs of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs become marginal.