Marginal cost are known to fall and then rise, creating a U-shape on a graph. At the beginning of production, not all inputs are being utilized correctly. One more units are added to production, the inputs are then utilized more efficiently. You then reach a point where limited resources are being used up and and your cost starts to rise. When your cost starts rising you begin to see less of a return.
Marginal cost are very helpful to firms, when they are deciding to increase or decrease production. Firms should produce until the point that marginal cost equals marginal revenue. When those two equal each other, they are maximizing their profit. If a firms marginal revenue is greater than the marginal cost, they should produce more units. If the firms marginal cost is greater than the marginal revenue, they should produce fewer units.
A personal example for me is with my landscape company that I am starting back up. I’m currently in the market for a new dump trailer. While I could save money by getting a smaller trailer that does not require me to have a cdl, I have opted to get a bigger trailer and get my cdl. I will pay more up front for a bigger trailer and to get my cdl, but in the long run I will be able to take bigger jobs and haul around loaders and heavier equipment. The opportunity cost for me is the higher priced trailer up front and giving up that money to eventually make more money by getting bigger jobs.
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