Increasing Costs and Diminishing Returns

or beach properties, where a product uses an input in limited supply. In the case of wine vineyards, good sites are limited in number. The annual output of wine can be increased to some extent by adding more labor to each acre of land. But the law of diminishing returns will eventually operate if variable factors of production, such as labor, are added to fixed amounts of a factor such as land.

As a result of diminishing returns, the marginal cost of producing wine increases as wine production rises. Figure g.g shows the rising supply curve SS. How will price be affected by an increase in demand? The figure shows that higher demand will increase the price of this good even in the long run with identical firms and free entry and exit.

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