1 meaning that consumers are very responsive to changes in price. A 1 percent rise in price will cause a 4.6 percent fall in quantity-demanded. If demand for a good is elastic then a rise in price will lower total revenue while a decrease in price will increase total revenue. The Law of Diminishing Marginal Returns occurs in the short-run period of time when some inputs are fixed. This results in the inevitable rise in marginal costs after some point in the process of increasing output.
Capacity is limited by the amount of plant and equipment in operation at a moment in time.
Calculate the marginal cost in the following production function. Remember AFC always falls as output increases while AVC turns up after some level of output. You can calculate AFC and AVC from the schedule above. The clue to the answer is in the relative change in AFC and AVC as output is increased in the short run. This also helps to understand why average total cost is U-Shaped.