Figure 2-9 Increasing Marginal Production Costs
diminishing marginal response. We will see such relations many times in
what follows, so we emphasize now that diminishing marginal response
does not mean that the total response is diminishing. In Figure 2-8 , the
total amount of pollution continues to fall as more and more is spent on
clean-up. But diminishing marginal response does mean that the amount
of pollution reduced per dollar of expenditure gets less and less as the
total expenditure rises.
Figure 2-9 shows a graph in which the marginal response is increasing.
The graph shows the relationship between annual production costs and
annual output for a firm that makes hockey sticks. Notice that the more
sticks produced annually, the higher the firm’s total costs. This is shown
by the positive slope of the line. Notice also that as more and more
hockey sticks are produced, the extra amount that the firm must pay to
produce each extra stick rises. For example, as the firm moves from point
A to point B, annual costs rise by $30 000 in order to increase its annual
output by 10 000 hockey sticks. Each extra stick costs
But when the firm is already producing many
more hockey sticks, such as at point C, its factory is closer to its capacity
and it becomes more costly to increase production. Moving from point
to point D, the firm’s annual costs increase by $150 000 in order to
increase its annual output by 10 000 hockey sticks. Each extra stick then
costs This figure illustrates a case of
increasing marginal cost, a characteristic of production that we will see
often in this book.
$ 3 ($ 30000 / 10000 =$ 3 ).
$ 15 ($ 150000 / 10000 =$ 15 ).