7.3 Production in the Short Run LO 3
The theory of short-run costs is concerned with how output varies as
different amounts of the variable factors are combined with given
amounts of the fixed factors. Total, average, and marginal product
curves describe relationships between output and the quantity of the
variable factors of production.
The law of diminishing returns asserts that if increasing quantities of
a variable factor are combined with given quantities of fixed factors,
the marginal and the average products of the variable factor will
eventually decrease. For given factor prices, this hypothesis implies
that marginal and average costs will eventually rise as output rises.