# Marginal Cost

Firms produce and sell a variety of goods in different market structures and their main goal is to maximize their profit. The cost of production is an important factor that firms have to consider. In this article, we will learn all about one type of cost: marginal cost. Ready to deep dive? Let’s go!

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## Marginal Cost Definition

Let's start with a marginal cost definition. Marginal cost is the extra cost incurred in producing one more unit of a product. It is the cost of producing one additional item. Simply put, marginal cost is the change in the cost for production when you decide to produce one more unit of a good.

Marginal cost (MC) is the additional cost of producing one more unit of a good or service.

It is calculated by dividing the change in total cost by the change in the quantity of output.

For example, let's say a bakery produces 100 cookies at a total cost of $50. The marginal cost of producing one more cookie would be calculated by dividing the additional cost of producing that extra cookie by the change in the quantity of output, which in this case is one. If the cost of producing the 101st cookie is$0.50, then the marginal cost of producing that cookie would be $0.50. ## Marginal Cost Formula The marginal cost formula is important for firms since it shows them how much each additional unit of output costs them. The marginal cost formula is: $$\hbox{Marginal Cost}=\frac{\hbox{Change in total cost}}{\hbox{Change in quantity of output}}$$ $$MC=\frac{\Delta TC}{\Delta QC}$$ Remember, average cost shows the cost per output unit. We can calculate the marginal cost using the following formula above, where ΔTC stands for the change in the total cost and ΔQ means the change in the quantity of output. ### How to calculate the marginal cost? How can we calculate the marginal cost using the marginal cost formula? Simply, follow the example below. With the marginal cost equation, we can find the per unit marginal cost of producing more products. Let's say the Willy Wonka chocolate firm produces chocolate bars. For example, if producing 5 more units of chocolate bars leads to an overall increase in the total cost by$40, the marginal cost of producing each of those 5 bars would be

$$\frac{40}{5}=8$$ .

## Marginal Cost Example

Marginal cost (MC) is defined as the additional cost of producing one more unit of a good or service. For example, the table below depicts the production quantities and costs of a firm that produces orange juice.

 Quantity of Orange Juice (Bottles) Fixed Cost of Production ($) Variable Cost of Production ($) Total Cost of Production ( $) Marginal Cost ($) 0 100 0 100 - 1 100 15 115 15 2 100 28 128 13 3 100 38 138 10 4 100 55 155 17 5 100 73 173 18 6 100 108 208 35

Table 1. Marginal Cost Example

In Table 1 above, the fixed, variable, total, and marginal cost associated with each bottle of orange juice is shown. When the company goes from producing 0 bottles of juice to 1 bottle of juice, the change in their total cost is $15 ($115 - $100), which is the marginal cost of producing that first bottle of juice. When producing the second bottle of juice, that bottle of juice causes an additional$13 in costs, which can be calculated by subtracting the total cost of production of producing 1 bottle of juice from 2 bottles of juice ($128 -$115). Thus, the marginal cost of producing the second bottle of juice is \$13.

Notice that the change in the total cost of production is equal to the change in variable cost because the fixed cost does not change as the quantity produced changes. So, you can also use the change in the total variable cost to calculate the marginal cost if the total cost is not given, or if a change in variable cost is easier to calculate. Remember, we are not dividing the total cost itself by the number of total units produced, we are dealing with the changes in both.

## Marginal Cost Curve

The marginal cost curve is the graphical representation of the relationship between the marginal cost and the quantity of output produced by this firm.

The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities. This means marginal cost declines by increasing the number of goods produced and reaches a minimum value at some point. Then it starts to increase after its minimum value has been reached. Figure 1 below shows a typical marginal cost curve.

Fig 1. - Marginal Cost Curve

## Marginal Cost Function

In Figure 1, we can see the marginal cost function, which illustrates how the marginal cost changes with different levels of quantity. The quantity is shown on the x-axis, whereas the marginal cost in dollars is given on the y-axis.

### Marginal Cost and Average Total Cost

The relationship between the marginal cost and average total cost is also important for firms.

Fig 2. - Marginal Cost and Average Total Cost

Because the point where the marginal cost curve intersects the average total cost curve shows the minimum-cost output. In Figure 2 above, we can see the marginal cost curve (MC) and the average total cost curve (ATC). The corresponding minimum-cost output point is Q in Figure 2. Further, we also see that this point corresponds to the bottom of the average total cost curve, or the minimum ATC.

This is in fact a general rule in the economy: the average total cost equals marginal cost at the minimum-cost output.

## Marginal Cost - Key takeaways

• Marginal Cost is the change in total cost caused by producing one more unit of product.
• Marginal cost is equal to the change in total cost divided by the change in the quantity of output produced.
• The marginal cost curve graphically represents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm.
• The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities.
• The point where the marginal cost curve intersects the average total cost curve shows the minimum-cost output.

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##### Frequently Asked Questions about Marginal Cost

What is marginal cost?

Marginal cost (MC) is defined as the additional cost of producing one more unit of a good or service

What is the difference between marginal cost and marginal revenue?

The marginal cost is the change in total production cost that comes from making or producing one additional unit. Marginal revenue, on the other hand, is the increase in revenue that comes from the sale of one additional unit.

How to calculate the marginal cost?

We can calculate the marginal cost by dividing the change in total cost by the change in the quantity of output.

What is the formula for marginal cost?

We can calculate the marginal cost by dividing ΔTC (which stands for the change in total cost) by ΔQ (which stands for the change in the quantity of output).

What is the marginal cost curve?

The marginal cost curve graphically represents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm.

Why does marginal cost increase?

Marginal cost may increase due to increasing pressure on fixed assets like building size when variable inputs such as labor are increased. In the short run, the marginal cost may first decline if the firm operates at a low level of output, but at some point, it starts to rise as the fixed assets become more utilized. In the long run, the firm can increase its fixed assets to match the desired output, and this can result in an increase in marginal cost as the firm produces more units.

## Test your knowledge with multiple choice flashcards

The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities.

We are not dividing the total cost itself by the number of total units produced to find the marginal cost.

The marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced.

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