The Beechmont Crest Guide to Economics
The Law of Increasing Costs
Every production process has fixed and variable inputs. When fixed inputs are held constant, each additional unit of a variable input provides a smaller benefit.
Suppose that HDTV Pro, an imaginary company that manufactures LCD high definition television sets, decides to increase its monthly production by one thousand high definition television sets.
Assuming that the company is already operating at efficient economies of scale, the extra HD TVs will cost the company more per unit to produce. The company will have to incur more variable costs (mainly overtime wages in this example), resulting in a higher per unit cost.
The management of HDTV Pro will therefore have to evaluate whether or not the additional one thousand units of production are in the company’s best interest. HDTV Pro can of course throw more labor (variable input) into the process. But since HDTV Pro’s plant and equipment are constant, the additional labor will have to be added to the process in the form of extra work hours. This will mean a higher labor cost per unit (because of overtime wages) for the additional television sets.