Which principle asserts that increased production leads to higher average costs after a certain point?

The principle that asserts increased production leads to higher average costs after a certain point is best captured by the law of diminishing returns. This economic concept states that as one input in the production process is incrementally increased while other inputs are held constant, there comes a point at which the additions of that input yield progressively smaller increases in output. Consequently, after surpassing this point, the cost of producing additional units becomes increasingly higher due to the inefficiencies that arise.

This principle is particularly relevant in scenarios where a fixed resource, such as land or machinery, cannot be expanded in proportion to other resources like labor and materials. In such cases, once production reaches an optimal level, further increases in production lead to inefficiencies and rising average costs, highlighting the diminishing returns on investments in those fixed resources.

Understanding this principle is crucial in decision-making regarding production levels, resource allocation, and cost management in economic contexts. It helps businesses and economists determine the most efficient production levels before costs begin to spiral due to inefficiencies.