Why does the marginal cost curve decrease initially, but then start to increase?

Question

BlackTom AI · Accepted Answer

Specialisation and division of labour increase worker productivity at low output, so marginal cost initially falls; later diminishing marginal returns to the variable input reduce productivity and cause marginal cost to rise.

1. Relevant knowledge points and concepts
- Marginal cost (MC) = change in total cost / change in output (ΔTC/ΔQ).
- With labor as the primary variable input and wage w constant, ΔTC = w·ΔL and ΔQ = marginal product of labor (MPL = ΔQ/ΔL). Thus MC = w / MPL.
- Specialisation/division of labour raise MPL at low employment (increasing returns to the variable input). Diminishing marginal returns mean MPL eventually falls as more labor is added to fixed capital.

2. Step-by-step reasoning
- Start from MC = w / MPL. If MPL increases, the denominator grows and MC falls. If MPL decreases, MC rises.
- At small output levels, dividing tasks and specialization let workers become more efficient, so MPL increases → MC falls.
- As more workers are added to fixed machinery or space, MPL begins to decline (diminishing returns) → MC rises.

3. Calculations / intermediate steps (algebraic)
- ΔTC = w·ΔL, ΔQ = MPL·ΔL → MC = ΔTC/ΔQ = (w·ΔL)/(MPL·ΔL) = w / MPL.
- Example: if w = $10 and MPL rises from 2 to 4, MC falls from $5 to $2.50; later if MPL falls to 1, MC rises to $10.

4. Why the correct answer is correct
- Option d explicitly identifies the short-run productivity gains from specialisation/division of labour (explaining the initial fall in MC) and the later onset of diminishing returns (explaining the rise). This matches the MC = w/MPL relationship and economic theory of the firm.

5. Why the other options are incorrect
- a: The law of supply and “workers become more productive” is mis-specified; supply doesn’t explain the initial fall and the causal phrases are confused.
- b: Claims initial fall is due to diminishing returns (wrong direction — diminishing returns raise MC).
- c: Again states initial fall is due to diminishing returns and later rise due to increased productivity (reversed).

6. Conclusion
- Therefore option d is correct: marginal costs fall due to specialisation and division of labour, but then rise as diminishing returns set in. This matches the provided answer.

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