College Preparatory Program • Saudi Aramco
Why the MC Curve Is U-Shaped
Macroeconomics Tips
Why Is the MC (Marginal Costs) Curve U-Shaped?
In order to explain this it is useful to study the relationship between
MP (Marginal Product) and MC (Marginal Costs).
Figure A:
Output
MP
Quantity of Labor
Figure B:
Costs
MC
Quantity of Output
Main Key Point: According to The Law of Diminishing Marginal Returns:

At some point the number of employees is more than is needed
to produce a given product. Therefore, production is less efficient.
So, in effect, as Figure A above illustrates, as Quantity of Labor increases,
Output (or the Marginal Product) per employee decreases.

Figure B illustrates that there is an inverse relationship between Marginal Product
and Marginal Costs. In other words, as output decreases Marginal Costs increase.
Key Point: More employees require more cost in salaries, which have to be paid out.
College Preparatory Program • Saudi Aramco
Why the MC Curve Is U-Shaped
Study the following chart for further explanation of the relationship between MP and MC.
Quantity of
Labor
∆Total Product
0
1
2
3
4
0
5
15
17
18
Marginal
Product
5
10
2
1
∆Total Costs
0
$10
$20
$30
$40
Marginal
Costs
$2
$1
$5
$10
Note: Each additional unit of labor adds $10 to the Total Costs
Key Point:
Marginal Cost = ∆Total Cost/∆Total Product

As Quantity of Labor increases Total Product Increases.

Notice that the increase of Labor from 1 to 2 triples the Total Product, increasing it by
10 to reach 15 in the Marginal Product column. To cover this additional production a
$10 increase in cost is required.

Dividing the change in Total Cost ($10) by the change in Total Product ($10),
a decrease in Marginal Cost (by 1) is realized.

However, an additional unit of labor (moving from 2 to 3) increases TP to 17 by a
Marginal Product factor of only 2. By dividing the ∆TC by ∆TP an increase by $4 in MC
is realized. Of course this is not a favorable situation since Marginal Costs are greater
than Marginal Benefits in this case.

Yet an additional laborer (4) adds one unit of total product at an additional cost of $10
per unit. Again Marginal Costs are greater than Marginal Benefits in this case.
Challenge: Look up on the Internet or in your textbook the meaning of
Marginal Benefits.
Final Point:
Look at the chart above and compare to the graphs: Figure A and in Figure B.
You can see that at one point as Marginal Product decreases, Marginal Costs
increase. This points out an inverse relationship between MP and MC.
Accordingly, the MC curve is U-shaped.