This underpins the short run production function. The Law of Diminishing Returns states that as successive increases in a variable factor are added to other fixed factors of production, such as capital, there will be a point beyond which the extra or marginal product will decline. We can see this in the table below with marginal product declining after three workers are employed. The average and marginal product curves that we get from this pattern of diminishing returns can be seen below. The short run is a period of time over which at least one factor of protion is fixed, the calendar time will vary from firm to firm.
Variable costs vary with output e.g. raw materials, components, labour.
Due to diminishing returns, these short run cost curves will be u-shaped. The cost may fall initially as there are increasing returns, but eventually when diminishing returns set in the costs will start to rise. The only curve this is not true for is the average fixed cost curve. This will decline continually as the same level of cost is spread over more and more output. These changes can be seen on the cost curves below.