Answer to Question #92937 in Economics of Enterprise for Terricka

Question

What does law of increasing costs state

Answer 1

The law of increasing costs states that as the factors of production are shift from producing of one good or service to another, then the production cost of a second item increases.

This is a commonly held economic principle which affirms that an operation which is utilizing fully its fixed cost resources and running peak efficiency will experience decrease in profitability per output unit as well as higher cost of production with further attempts to increase production. Managers and business owners usually try to fully utilize all the factors of production in order to reduce inefficiency and maximize profits. However, at particular level of production, the firm will achieve maximum efficiency of its output with fixed amount of expense and overhead. Therefore, in order to further increase production, the firm will have to increase its costs by increasing materials, labor, and equipment. This will subsequently increase the cost of production for each additional unit and narrows the profit margin.