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Diminishing marginal returns

Explain how diminishing marginal returns give short-run cost curves their shape

In the short run a firm adds workers to capital it cannot change

The short run is the period during which at least some factors of production are fixed. A bakery has one set of ovens until it can buy more, so to make more bread it can only add workers and flour. At first each extra worker adds more than the one before: a second baker frees the first from serving, answering the phone and sweeping, so both can specialise. The marginal product of labour, the extra output of one more worker, rises.

The marginal product of labourVertical axis: Extra output from one more worker. Horizontal axis: Number of workers. MP: a hump-shaped curve. A point at L1 on the horizontal axis.L1MP
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RisingUp to L1 workers, each one adds more output than the last: they divide up the tasks.

Marginal product rises while the extra workers let each other specialise, then falls once the fixed capital is shared among too many.

Sooner or later each extra worker adds less than the last

The gains from specialisation run out. With the ovens fixed, a fifth or sixth baker has less equipment to work with and spends time waiting for an oven to come free. Total output still rises, but by less with each worker added. In the end workers may get in each other's way and output can even fall. The cause is the fixed factor: each extra unit of the variable input has less of it to work with, so it contributes less to overall production.