Diminishing Marginal Returns Case Study

Decent Essays
Explain the impact the law of diminishing marginal returns has on both marginal cost and average total cost

MARGINAL COST

Marginal cost is a total cost to the company to produce one more product. This cost changes depending on how many products the company aims to produce. Changes in production may increase or decrease the marginal cost due to the marginal cost including all costs such as materials, labour, infrastructure.

Marginal cost diagram has a U-shaped curve as a result of increasing and then decreasing marginal returns. It is caused by the law of diminishing marginal returns. The law affects both short-run production of the company as well the cost of the production. This results in a positively-sloped supply curve for profit-maximising
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First of all profits are uncertain, hence the companies cannot maximise their profits under the conditions of uncertainty. Secondly that theory assumes all managers and owners of the company have perfect knowledge about their expenses, costs and revenues. Firms do not have an accurate knowledge about the conditions under which they operate. And most importantly pursuing the profit maximisation strategy can be very risky to the company as the company may be attached only to one strategy and it may lose a lot of revenue when they do not take other strategies and aspects into consideration.

Marginal revenue-marginal cost perspective

If for each unit sold marginal profit is equal to marginal revenue minus marginal cost, then when the marginal revenue is bigger than marginal costs, marginal profit will be positive and hence the bigger quantity needs to be produced. When marginal revenue equals marginal cost at the output, marginal profit equals to zero and this quantity maximises the profit.

4. Characteristics of oligopoly and price and output behaviour of the large UK energy
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Importance of advertising and selling costs which plays a significant role in the oligopolistic market structure. It is due to the companies aiming to maximise profits and market share which moves them towards aggressive advertisement to combat competition.
3. Group behaviour which states that due to the small number of companies, oligopolistic firms are interdependent as they are in the group. They do not behave in such a way to maximise profits and compete against each other due to saturated market.
4. Indeterminateness of demand curve which is a direct result of interdependence. It creates uncertainty for all the companies as under oligopoly no firm can predict the result of its price policy. As a result, the demand curve facing oligopolistic firm losses its determinateness.
5. Elements of monopoly are also present in oligopolistic companies as each firm controls a large piece of the market by producing a specific product. In this case they act like monopolistic companies.
6. There is also an existence of price rigidity in the oligopolistic companies. If any company changes their pricing policy it automatically affects other firms too. Once one company cuts its prices the rivals will follow and cut their prices too. The net result will be price finite or price-rigidity in the oligopolistic

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