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Why Marginal Cost Eventually Increases

August 25, 2009

First let’s do some graphs. Those¬† readers who are willing to do a West Virginia Power Point with me, please raise your right arm and hold it straight out to your side (point at the wall). That graph is constant Marginal Cost. That would be a situation where each additional unit produced cost exactly as much as the previous units to produce.

Now raise your hand above your shoulder without lowering your elbow. This is increasing Marginal Cost. My favorite example of this is brushing your teeth. The lowest cost way of having everyone’s teeth brushed is to let them do it themselves. There are no tooth brushing businesses where a lady comes to your home twice a day and brushes your teeth. It would simply be too costly. It might be a different case for people with dentures, but that’s beside the point.

Now lower your elbow to below your shoulder, while keeping your hand above your elbow.¬† This is what the MC graph in most Econ text books looks like. Marginal Cost decreases initially, then increases. Think about making dinner. If you make dinner for yourself, it takes little more effort to make an additional plate for a friend. As long as you’re making two plates, it’s still less effort to make the third plate. But what about the 45th plate? Where MC is at it’s lowest (your elbow) is called the Minimum Efficient Scale (but that’s for a text book, let’s got on with this essay).

Let’s try to demonstrate that Marginal Cost of an activity will eventually increase. Note, that Marginal Cost will <i>eventually</i> increase if that activity is engaged in for a long enough period of time. The limit as t goes to infinity of MC(t) = L where L > MC(t-1).

To demonstrate this, I will start by trying to show MC remaining constant.

Imagine you are in a room. There is one door which leads to a restroom. Mounted in the wall is a computer with only one function–a survey that you are supposed to fill out. You cannot damage the computer, you can only complete the survey. Behind a bullet proof window is Dr. Xavier from X men. He wants you to fill out that survey again and again forever. You appear to have two possible actions: fill out the survey, or day dream. You try to day dream, but Dr. X won’t let you.

So now it appears that you have only one course of action: fill out the survey. Dr. X will not let you do anything else, so you have no opportunity cost.

Shouldn’t your Marginal Cost be constant? No! Eventually you will need to use that restroom. Completing the survey again when you really have to go will be uncomfortable. You need to sleep eventually. Eventually you will be drowsy and will have to poo. Your marginal cost WILL increase.

There are biological limits to the constancy of Marginal Cost. There are many other examples, of course. See if you can come up with a novel example of your own.

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