A Note on the Marginal Cost Curve
Faced by the Firm
The traditional depiction of the marginal cost curve faced by the firm is a smooth U-shape, beginning at the vertical axis and passing through the initially higher average cost curve at the smooth average cost curve's minimum point. The factual conditions necessary for such a curve to be a realistic description of the situation faced by a firm are so preposterous as to render this construction positively misleading about real world marginal cost. This is not because of indivisibilities, although indivisibilities would certainly also render the smooth curves unrealistic. Everybody knows that we draw the curves smoothly as an approximation. Rather it is because (1) the production of additional units requires a standard mix of inputs added to the initially indivisible one(s) and (2) the bidding for the additional resources drives up their prices.
Suppose that one (or a number of resources) is indivisible and a unit of it is absolutely necessary for production to begin. Then the marginal cost of the first unit will equal the cost of that first resource, say 1C1, plus the costs of the other 2...n resources: 1C2 + 1C3....1Cn. Let us call the marginal cost of the first unit 1MC. Now consider the marginal cost of the second unit, 2MC. It will be 1C2 + 2C3...2Cn.. Given a sufficiently high price of 1C1 and a sufficiently low increase in the prices of resources 2...n, 2MC will be lower than 1MC. Now consider 3MC. Under what conditions would 3MC be less than 2MC? One answer is that another indivisible resource is needed to produce the second unit which was not needed to produce the first unit. It is difficult to conceive of any realistic situation in which this would occur. The same reasoning follows for a comparison of 4MC with 3MC. And so on.
The proper construction of the MC curve appears to be a rising curve after the first unit. The curve sharply drops from something above the cost of the first unit to the marginal cost of the second unit. Then it rises after that as the firm must bid up the prices of successive units. The following graph indicates this, although it is not drawn to scale.
Gunning’s Address
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
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Email: gunning@fcu.edu.tw