Marginal cost is an economic concept referring to the cost associated with producing one additional unit of a product or service. In other words, it describes the incremental change in total production costs caused by increasing (or decreasing) output by a single unit.
Calculating marginal cost involves taking the change in total cost and dividing it by the change in the quantity produced. For instance, if producing 10 units of a product costs $100, and producing 11 units costs $109, the marginal cost of producing the 11th unit is $9.
Understanding marginal cost helps businesses optimize production levels to maximize profits. Typically, companies continue to produce additional units of goods or provide more services until marginal cost equals marginal revenue, at which point profitability peaks.
Additionally, marginal cost often changes due to factors like economies of scale or resource availability, meaning it can decrease initially but eventually rise due to increased complexity or resource constraints.
In short, marginal cost analysis guides vital business decisions related to production, pricing, and resource allocation, highlighting the incremental impact of each additional product manufactured or service performed.
