We found that the shape of the total and variable cost curves followed directly from the shape of the total product curve. The cause of that shape is the law of diminishing returns. The graphical models in Figures 1 - 4 are useful for seeing the connection between production and costs. Every problem is looked at by comparing the cost of an additional step with the benefits of that additional step. So the cost information of most importance to an economist is the marginal cost of production.
Marginal cost shows the additional cost of producing one more unit of output.
Post your answer to Webboard under the Production conference. Two other important measures of the cost of production are the average total and average variable costs. Let's use Excel to take a graphical look at these functions. Click on the following link to download the Minimizing Production Costs Workbook . Work through Tutorial 8 Question 8.