Thelma can still produce more lemonade by adding workers, but these new workers have to work in crowded conditions and may have to wait to use the equipment. But at a certain point as Thelma produces larger and larger quantities of lemonade, her stand become crowded with workers, and her equipment is fully utilized. Because she can easily put these idle resources to use, the marginal product of early extra workers is large, and the MC of an extra glass is small. When Thelma is producing a small Quantity of lemonade, she has few workers, and much of her equipment is not being used. Imagine a lemonade stand owned by Thelma. This gives MC its distinctive swoosh shape. Once all the efficiencies of production have been exploited MC increase due to diminishing marginal returns. The simple answer is diminishing marginal returns.Īssuming costs are on the vertical axis and quantity is on the horizontal axis, marginal cost curves are usually positive, reflecting higher costs, after the initial period of down sloping caused by increasing efficiency.
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