Marginal Cost

Marginal Cost is the increase in total cost that arises from producing one additional unit of a good or service. It is calculated by taking the change in total cost when output is increased by one unit, divided by the change in output. Marginal cost is an important concept in Economics as it helps firms determine the optimal level of production.

Formula:
Marginal Cost (MC) = ΔTotal Cost / ΔQuantity

Example 1: If a factory’s total cost to produce 100 units is $1,000 and the total cost to produce 101 units is $1,010, the Marginal cost of producing the 101st unit is:

MC = ($1,010 – $1,000) / (101 – 100) = $10

Example 2: In a bakery, if producing 50 loaves of bread costs $200 and producing 51 loaves costs $203, the Marginal cost of the 51st loaf is:

MC = ($203 – $200) / (51 – 50) = $3

Case Study: A car manufacturer may find that the Marginal cost of producing an additional car decreases due to economies of scale when production increases from 1,000 to 1,500 cars. If the total cost to produce 1,000 cars is $20 million and the cost to produce 1,500 cars is $28 million, the Marginal cost for the additional 500 cars is:

MC = ($28 million – $20 million) / (1,500 – 1,000) = $16,000