What happens to the marginal cost when a firm produces more units?

When a firm produces more units, the marginal cost often increases due to the law of diminishing returns. As production expands, the resources employed, such as labor and materials, may become less efficient. In simpler terms, as a company makes more of a product, it might need to employ less efficient methods or hire additional workers who are not as productive as the original employees, leading to higher costs for each additional unit produced.

This concept reflects the reality that as you produce more, you might exhaust the most efficient production techniques, forcing you to use less effective methods that require greater expenses, thereby causing marginal costs to rise. This is particularly evident in industries where the scale of production affects the cost structure due to limited resources or capacity constraints.

In contrast, marginal costs may remain constant or decrease only under certain conditions, such as economies of scale, where efficiencies gained from larger production levels can lead to lower costs. However, in many real-world scenarios, as output increases, the firm's marginal costs more commonly experience an upward trend.