Short-Run Production and Cost Curves

increasing returns

diminishing returns

fixed costs

The standard cubic short-run production function, with input

x

and output

q

, exhibits increasing returns with respect to the input variable over some low range of

x

. However, as more of the input is used, eventually diminishing returns set in. This production function results in the typical U-shaped average and marginal cost curves. The relative importance of increasing versus diminishing returns (the quadratic and cubic terms in the production function) determines the shapes of the cost curves. If there are neither increasing nor diminishing returns, the production function is linear and the average and marginal cost curves are equal and constant.