Is there a Law of Diminishing Marginal Cost? What is it, or why isn’t there one?
Answer:
It is all about the fix costs ..
Lets assume you have a production for a product and a machine which can make 1000 pieces of this product per day if it runs 24 hours. The fix cost for the machine should be 1000 $ for this day (meaning: independant howmuch you produce you have this cost).
Then you have cost for material of $ 50/piece: they are called variable cost. The total ! cost for material increases depending howmuch you produce. e.g. for 1 piece you have 50 $, for 2 pieces 100 $ for 3 pieces 150 $ a.s.o. but for every single unit is stays the same.
Now what are your production costs per unit ! depending on your output (means: really produced products) ?
cost per unit = (fix cost/produced units) + variable costs/unit.
e.g.
(1000 $ fix cost/ 1 produced unit) + 50 $ variable cost = 1050 $ (for 1 unit)
for 2 units : (1000/2) + 50 = 550 $
for 3 units: (1000 /3) + 50 = 383 $
for 4 units: (1000/4) + 50 = 300 $
You see that the cost per unit ! start to decrease:
1 unit = $ 1050
2 units = $ 550
3 units = $ 383
4 units:= $ 300
The marginal cost ! reduction know is:
from 1 to 2 units = -500 $
from 2 to 3 units: = - 167 $
from 3 to 4 units:= - 83 $
this mean for every additional ! unit your cost/unit decrease but the decrease gets smaller and smaller. This is called the law of diminishing (measn getting smaller and smaller) marginal costs.
The lowest cost per unit you can reach when you produce all possible 1000 units: (1000 $/1000 units) + 50 $ for material is $ 51/unit.
No - there is no such law.
Why? Because Congress couldn't stop fighting long enough...
LOL
Yes, there is.
Explanation: Let's pretend I make frisbees. In order to do so I need a mold, as well as some plastic crap. The plastic is a variable cost - which means the cost of plastic raw material will increase according to how many frisbees you make. The mold is a lumpy cost. **This is a cost that stays constant no matter how many frisbees are made** <-- that's the key.
So, say the mold costs $5, and it costs $2 in plastic to make each frisbee. If I make one frisbee my total cost (TC) is $7. If I make two frisbees, the cost of the mold stays the same, but the plastic costs increase.
That means, it only costs an additional $2 per unit (for the plastic) for each extra frisbee that I produce. $2 is the MC.
This is a simple example of the exploitation of economies of scale - if I have a whole factory that can be operated 24/7 - I have the chance to make many, many, many frisbees. The most frisbees I make the more it offsets the sunk cost for production facilities. I can also take advantage of buying raw materials in bulk for a discount and also create a tricky transportation plan to reduce transport costs (distance kills profits!).
The more you make, the more money you can save and the marginal cost per unit decreases - increasing profit margins...making this really desirable.
No, there isn't. The reason is that marginal cost can only decline so much before it begins to increase again due to diminishing returns...
There is a law of diminishing marginal cost, however it is only applicable in one economic system. This economic system is the "Natural Monopoly". A natural monopoly is a theoretical market in which there is one producer, however this producer can supply this market more efficiently than if this market was a fully competitive market. The Marginal cost curve is a downward sloping hyperbole which has an asymptote with the horizontal fixed cost displaying a diminishing nature. The more people who buy from this firm the greater the economy of scale and the lower the costs. Supposed examples of this are the mail service, water services, usually govt run industries. Whether they display this phenomenon however is much debated.
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