Marginal Cost
Marginal cost is the change in total cost that results from producing one additional unit of output. It is a fundamental concept in microeconomics and a key determinant of a firm's production decisions and of market supply.[1]
Definition
Marginal cost is calculated as the change in total cost divided by the change in quantity produced:
- Marginal cost = Δ Total cost ÷ Δ Quantity produced
Because fixed costs do not change with output, marginal cost is determined entirely by variable costs in the short run.[1]
Relationship to other cost concepts
| Concept | Description |
|---|---|
| Total cost | The sum of all fixed and variable costs of production. |
| Average cost | Total cost divided by the quantity produced. |
| Marginal cost | The additional cost of producing one more unit. |
| Opportunity cost | The value of the best alternative forgone. |
Marginal cost and supply
In a perfectly competitive market, a profit-maximising firm produces up to the point at which marginal cost equals marginal revenue (which, for a price-taking firm, equals the market price). The marginal cost curve therefore coincides with the firm's short-run supply curve above the minimum of average variable cost. Summing the marginal cost curves of all firms yields the market supply curve.[1]
Importance
Marginal cost is central to the analysis of pricing, production, and resource allocation. The principle that a firm should equate marginal cost to marginal revenue, and that a society should allocate resources so that marginal social cost equals marginal social benefit, is one of the most important results in economics.[1]