Is there a Law of Diminishing Marginal Cost? What is it, or why isn’t there one?

Answer 1

It is all about the fix costs .....

Lets assume you have a production for a product and a machine which can make 1000 pieces of this product per day if it runs 24 hours. The fix cost for the machine should be 1000 $ for this day (meaning: independant howmuch you produce you have this cost).

Then you have cost for material of $ 50/piece: they are called variable cost. The total ! cost for material increases depending howmuch you produce. e.g. for 1 piece you have 50 $, for 2 pieces 100 $ for 3 pieces 150 $ a.s.o. but for every single unit is stays the same.

Now what are your production costs per unit ! depending on your output (means: really produced products) ?

cost per unit = (fix cost/produced units) + variable costs/unit.

e.g.

(1000 $ fix cost/ 1 produced unit) + 50 $ variable cost = 1050 $ (for 1 unit)

for 2 units : (1000/2) + 50 = 550 $
for 3 units: (1000 /3) + 50 = 383 $
for 4 units: (1000/4) + 50 = 300 $

You see that the cost per unit ! start to decrease:

1 unit = $ 1050
2 units = $ 550
3 units = $ 383
4 units:= $ 300

The marginal cost ! reduction know is:

from 1 to 2 units = -500 $
from 2 to 3 units: = - 167 $
from 3 to 4 units:= - 83 $

this mean for every additional !!! unit your cost/unit decrease but the decrease gets smaller and smaller. This is called the law of diminishing (measn getting smaller and smaller) marginal costs.

The lowest cost per unit you can reach when you produce all possible 1000 units: (1000 $/1000 units) + 50 $ for material is $ 51/unit.

Answer 2

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RE:
Is there a Law of Diminishing Marginal Cost? What is it, or why isn’t there one?

Answer 3

There is a law of diminishing marginal cost, however it is only applicable in one economic system. This economic system is the "Natural Monopoly". A natural monopoly is a theoretical market in which there is one producer, however this producer can supply this market more efficiently than if this market was a fully competitive market. The Marginal cost curve is a downward sloping hyperbole which has an asymptote with the horizontal fixed cost displaying a diminishing nature. The more people who buy from this firm the greater the economy of scale and the lower the costs. Supposed examples of this are the mail service, water services, usually govt run industries. Whether they display this phenomenon however is much debated.

Answer 4

Yes, there is.

Explanation: Let's pretend I make frisbees. In order to do so I need a mold, as well as some plastic crap. The plastic is a variable cost - which means the cost of plastic raw material will increase according to how many frisbees you make. The mold is a lumpy cost. **This is a cost that stays constant no matter how many frisbees are made** <-- that's the key.

So, say the mold costs $5, and it costs $2 in plastic to make each frisbee. If I make one frisbee my total cost (TC) is $7. If I make two frisbees, the cost of the mold stays the same, but the plastic costs increase.

That means, it only costs an additional $2 per unit (for the plastic) for each extra frisbee that I produce. $2 is the MC.

This is a simple example of the exploitation of economies of scale - if I have a whole factory that can be operated 24/7 - I have the chance to make many, many, many frisbees. The most frisbees I make the more it offsets the sunk cost for production facilities. I can also take advantage of buying raw materials in bulk for a discount and also create a tricky transportation plan to reduce transport costs (distance kills profits!).

The more you make, the more money you can save and the marginal cost per unit decreases - increasing profit margins...making this really desirable.

Answer 5

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ESTABLISHING AND ALLOCATING THE PROMOTIONAL BUDGET As noted in the text, the budgeting decision is not a trivial matter. Whether the firm is spending millions of dollars or thousands, this decision will have a direct impact on the success of the communications program. As can be seen by examining the decision sequence model presented in Chapter 1, budgeting decisions are not made in isolation. These decisions require an interactive process in which the communications objectives must be taken into consideration. Likewise, the budget directly impacts the promotional mix strategies that are to be developed. Thus, both the size of the budget, and the way that it will be allocated must be given much attention A. Establishing the Budget 1. Theoretical issues in budget setting—most of the models used to establish advertising budgets can be categorized as taking an advertising or sales response perspective. In this section we discuss some of these. a. Marginal analysis—Figure 7-9 in the text illustrates the concept of marginal analysis. As the figure indicates, as advertising/promotional efforts increase, sales and gross margins will also increase to a point and then level off. In using marginal analysis, the firm would continue to spend promotional dollars so long as the marginal revenues created by these expenditures exceeded the incremental costs. When the dollar expenditures exceed the returns, the budget should be scaled back. In other words, the optimal budget would be at that point where marginal revenues are equal to marginal costs, or where mr = mc. While this economic model seems logical intuitively, in fact, there are two major weaknesses that limit its applicability: (1) The assumption that sales are a direct measure of advertising and promotions efforts, and (2) the assumption that sales are determined solely by advertising and promotions. b. Sales response models—two budgeting models based on sales response are discussed in the text. The first of these—the concave-downward function—is based on the microeconomic theory of the law of diminishing returns. Essentially, the model states that as the amount of advertising expenditures increases, its incremental value decreases. The basic argument is that those most likely to buy the product are likely to do so as a result of the earliest exposures. Additional exposures are not likely to increase the probability of their purchasing, nor is it likely to have an effect on those who are undecided or unlikely to buy. Thus, the effects of advertising would rapidly diminish. The second model—the S-shaped response function—takes a very different approach. In this model, it is argued that initial outlays of promotional dollars will have very little impact on sales. As indicated in Exhibit 7-10, in Range B an impact will begin to be noticed, carrying through to Range C, where additional expenditures have again very little impact. This S-shaped curve suggests that there are incremental values to be accrued from additional dollar outlays, but only to a point. For example, it would be argued that a certain level of expenditures is necessary to make an impact. However, after a certain point (beginning of Range C) these dollars are unlikely to be of value. In other words, no matter how much I spend, if you don’t want the product, advertising isn’t going to make you buy. As with marginal analysis, the marketer would want to establish the budget at the point where s/he gets the optimal value for the outlay. c. Additional factors considered in budget setting—In addition to considering the theoretical aspects of budget setting, a number of other factors must be taken into consideration including: situational factors; customer factors; the competitive environment; etc.

Answer 6

No, there isn't. The reason is that marginal cost can only decline so much before it begins to increase again due to diminishing returns...

Answer 7

No - there is no such law.

Why? Because Congress couldn't stop fighting long enough...

LOL