Marginal Cost

Published Jan 5, 2023

Definition of Marginal Cost

Marginal cost is defined as the additional cost incurred by producing one additional unit of a good or service. That means it is the cost of producing one more unit of a good or service, taking into account all the additional production costs associated with producing that single unit.

It can be calculated by dividing the change in total expenses by the change in the number of units produced.

Example

To illustrate this, let’s say a company produces widgets. The company has fixed costs of USD 10,000 per month, which include expenses like rent, utilities, and salaries. In addition to that, the company incurs variable costs of USD 5.00 per widget. In that case, the marginal cost of producing one additional widget is USD 5.00 (i.e., it is the same as the variable costs per unit).

However, if the company had to buy an additional machine for USD 1,000 to produce the additional widget, the marginal cost of that widget would be USD 1,005.00 because it considers the change in total production cost associated with the additional unit of output.

Why Marginal Cost Matters

Marginal cost is an important concept in economics, as it helps to determine the optimal level of production for a company. That means it helps companies to decide how much to produce in order to maximize their profits. By calculating the additional costs of producing one more unit, companies can determine the point at which the cost of producing one more unit is equal to the revenue generated by that unit. This is usually the point that maximizes profit. Therefore, knowing this point helps companies to determine the optimal level of production.