Supply Analysis:The Firm

Increasing marginal returns: marginal product increases as additional units of that input are employed.

Initially, a firm can experience increasing returns from adding labor to the production process. But after a certain output level, the law of diminishing marginal returns becomes evident.

Marginal returns are directly related to input productivity, a measure of the output per unit of input.

The total cost of production (TC):

TC = (w)(L) + (r)(K)

Two things could cause the cost of producing any given level of output to fall:

Either the price of one or both inputs could fall or the inputs themselves could become more productive and less of them would be needed