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In my economics class, we are learning about the Law of Increasing Marginal Cost, but searching for that online doesn’t generate any results. I’m confused about why marginal cost increases rather than stays constant. For instance, if it costs 5 dollars to produce one item, it would make intuitive sense for it to cost 10 dollars to produce two items (5 dollars per item). And 15 dollars to produce three items, and so on and so forth. The marginal cost of each item would be 5 dollars in this case. But according to the Law of Increasing Marginal Cost, the marginal cost will increase rather than stay constant. In the textbook example, it says the 1st unit costs five dollars, the 2nd unit costs 11 dollars, and the 3rd unit costs 19 dollars. Marginal cost of the 2nd unit is 6 dollars and marginal cost of the 3rd unit is 8 dollars. Why is it irregular like this?

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Marginal costs can be constant over portion of a cost curve but eventually they have to increase because resources will get scarce and there are diminishing returns to production eventually.

Consider for example oil production. At the beginning you might start extracting oil only from reservoirs where oil literally just springs out of the ground like a river stream. However, if demand gets too high you wont be able to get enough oil from easy to extract locations. You will have to start doing fracking or drilling on the ocean floor which is more expensive so marginal costs increase.

In a factory setting you might have constant marginal costs at the beginning but at some point if you will produce too much they will start increasing. You will already hire all available labor in the local town so you will have to encourage people with higher wages. You will have to demand more and more of scarce raw materials bidding up the price. You will have to demand more and more scarce capital increasing the rates of return people will demand in exchange for that capital.

In addition there are also diminishing marginal returns. There is only so much crop you can get out of a plot of a land, no matter how much capital and labor you throw at it. Usually the output per acre will diminish and at some point even fall as you add more factors of production (e.g. at some point extra workers and tractors just block each other). Similarly, you might increase production in a restaurant when you hire more cooks but the production will not be increasing proportionally as expanding staff will get harder to manage and eventually cooks will just get into each other's way.

So at some point marginal costs have to increase due to scarcity and diminishing marginal returns. This being said, in real life there might be many firms which never produce enough to experience increasing marginal costs. So in real life you can have firms that produce under decreasing or constant marginal costs, but at some point any firm's marginal costs would have to increase.

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  • $\begingroup$ Thank you for your answer. In your crops example, you say “output per acre will diminish.” If it’s marginal, then shouldn’t it be each additional acre decreasing in yield, rather than all acres diminishing uniformly? $\endgroup$ Nov 6, 2022 at 21:31
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    $\begingroup$ @AnthonyFallone You are welcome, if it answers your question consider accepting it. Regarding the question in the comment: it applies both per unit of land, and both to land itself. When I was talking about per acre of land I was highlighting the diminishing returns from capital and labor applied to one acre of land. However, you are right it applies to land itself since you will start at the land with best soil and move onto land with worse and worse soil. $\endgroup$
    – 1muflon1
    Nov 6, 2022 at 23:37

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