• The quantity of output in which marginal cost is at a minimum is the same quantity of output produced by the variable input when the marginal product of the variable input is at a maximum.


• Over the range of production in which marginal product increases and the variable input experiences increasing marginal returns, the marginal cost curve declines.


• Over the range of production in which marginal product increases and the variable input experiences decreasing marginal returns brought on by the law of diminishing marginal returns, the marginal cost curve is rising.

Marginal Cost and Marginal Product

This diagram displays the marginal product and marginal cost for the production of Wacky Willy Stuffed Amigos (those cute and cuddly armadillos, tarantulas, scorpions, and rattlesnakes). The top panel presents the marginal product of the variable input used to produced Stuffed Amigos. The bottom panel contains the marginal cost of producing Stuffed Amigos.

• The marginal product curve in the upper panel has a distinctive hump-shape, with marginal product rising, reaching a peak, then falling. The rising portion of the marginal product curve is the result of increasing marginal returns. The falling portion is attributable to decreasing marginal returns, and in particular, the law of diminishing marginal returns.


• The marginal cost curve in the lower panel has a distinctive U-shape, with marginal cost falling, reaching a minimum, then rising. The falling portion of the marginal product curve is the result of increasing marginal returns. The rising portion is attributable to decreasing marginal returns, and in particular, the law of diminishing marginal returns.

How does this work?

Stage I: Increasing Marginal Returns

• Suppose that the first worker employed by The Wacky Willy Company has a marginal product of one Stuffed Amigo and is paid $5 an hour. In this case, the marginal cost of producing the first Stuffed Amigo is $5. One worker, working one hour, produces one Stuffed Amigo, and the cost is $5.


• Now suppose, with increasing marginal returns, that the second worker has a marginal product of 2 Stuffed Amigos, but is paid $5 per hour like the first worker. In this case, the marginal cost of producing the second Stuffed Amigo is only $2.50. With a greater marginal product, the second worker needs to work only half-an-hour to produce one Stuffed Amigo, at a marginal cost of $2.50. One worker, working half-an-hour, produces one Stuffed Amigo, and the cost is $2.50.

Stage II: Decreasing Marginal Returns

• Suppose that the 101st worker employed by The Wacky Willy Company has a marginal product of 10 Stuffed Amigos and again is paid $5 an hour. In this case, the marginal cost of producing the one Stuffed Amigo is $0.50. One worker, working one-tenth of an hour, produces one Stuffed Amigo, and the cost is $0.50.


• Now suppose, with decreasing marginal returns, that the 102nd worker has a marginal product of 5 Stuffed Amigos, but is also paid $5 per hour like the other workers. In this case, the marginal cost of producing the one Stuffed Amigo is only $1. With a declining marginal product, the 102nd worker needs to work one-fifth of an hour to produce one Stuffed Amigo, at a marginal cost of $1.