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Marginal Cost and Average Total Cost
Marginal Cost and Average Total Cost

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Marginal Cost

Marginal cost is the additional cost that an entity incurs to produce one extra unit of output. In other words, it is the change in the total production cost with the change in producing one extra unit of output. Let us learn more about the marginal cost along with its formula in this article.

1. What is Marginal Cost?
2. Marginal Cost Formula
3. How to Calculate Marginal Cost?
4. Marginal Cost Curve
5. Marginal Cost Vs Marginal Benefit
6. FAQs on Marginal Cost

What is Marginal Cost?

Marginal cost is the change in the total cost of production by producing one additional unit of output. It is useful for the firms to find the marginal cost to understand the impact of the production of an additional unit on the overall cost of production and thus to make relevant decisions related to production in their firm.

Marginal Cost Definition: Marginal cost is defined as the cost of producing an additional unit of output. It is the ratio of the change in the total production cost to the change in the number of units produced. At zero level of production, i.e when the quantity produces is 0, then the marginal cost is not defined.

Learn about the marginal cost formula in the section below.

Marginal Cost Formula

The formula to calculate the marginal cost of production is given as ΔC/ΔQ, where Δ means change. Here, ΔC represents the change in the total cost of production and ΔQ represents the change in quantity.

When the quantity is increased by 1 unit, then the marginal cost of the nth unit of production can also be calculated using the following formula: MCn = TCn – TCn-1, where MC represents marginal cost and TC represents the total cost. Here, it is important to note that the marginal cost is different from the average cost of production, as average cost means the average cost of producing 1 output, while the marginal cost means the change in the cost by producing an additional unit of output. When the marginal cost formula is ΔC/ΔQ, the formula for average cost is TC/TQ, where TC = total cost of production and TQ = total quantity.

How to Calculate Marginal Cost?

For calculating marginal cost, we just need to learn how to identify the change in the total cost and the change in quantity by looking at the given data. For example, if a company had produced 2 packs of juice earlier with a total cost of $12, and now it produces one extra unit, i.e. 3 packs of juice at a total cost of $15. So, the marginal cost of producing that 1 additional unit of juice pack can be calculated as ΔC/ΔQ, where ΔC = $15 – $12 = $3, and ΔQ = 3 – 2 = 1. Thus, the marginal cost is $3/1 = $3. The steps to calculate the marginal cost of production are given below:

  • Step 1: Find the value of ΔC (change in the overall production cost).
  • Step 2: Find the value of ΔQ (change in the total output or quantity).
  • Step 3: Find ΔC/ΔQ by dividing the value obtained in step 1 by the value obtained in step 2.

Let us take an example of calculating marginal cost. Given below is the data of the total cost of production of a firm producing school uniforms. We will be finding the marginal cost by observing the changes in the total cost and in the output produced.

Number of Uniforms (Output) Total Cost (in $) Marginal Cost (ΔC/ΔQ)
5 68 68/5 = $13.6
6 76 (76-68)/(6-5) = 8/1 = $8
8 88 (88-76)/(8-6) = 12/2 = $6
9 96 (96-88)/(9-8) = 8/1 = $8
10 110 (110-96)/(10-9) = 14/1 = $14

Marginal Cost Curve

The marginal cost curve is a U-shaped curve. It indicates that initially when the production starts, the marginal cost is comparatively high as it reflects the total cost including fixed and variable costs. In the initial stage, the cost of production is high as it includes the cost of machines, setting up a factory, and other expenses. That is why the marginal cost curve (MC curve) starts with a higher value. Then it shows a decline as with the same fixed cost, many units are produced, keeping the cost of production low. After it reaches the minimum level or point, it again starts rising to show a rise in the cost of production. It is because of the exhaustion of resources or the overuse of resources. The marginal cost curve is given below for your better understanding.

Marginal Cost Vs Marginal Benefit

Marginal benefit and marginal cost are two important measures of the change in the value or price of a product. We have already discussed the meaning of marginal cost. Now let us understand what is marginal benefit. The marginal benefit describes what consumers are willing to pay to get an additional unit or the item. Marginal cost is a factor or measurement from the producer’s side, but the marginal benefit is a measure from the consumer’s side. It generally decreases with the increase in consumption by the consumer, as customer satisfaction tends to decrease with the increase in the consumption of the same commodity. The difference between marginal cost and marginal benefit is shown in the table below:

Marginal Cost Marginal Benefit
Cost of producing an additional unit of output. Price of consuming an additional unit of the product.
It is a measure from the producer’s side. It is a measure from the consumer’s side.
Declines with the increase in production initially, but then increases gradually. Declines with the increase in the consumption of a good by a customer.

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Marginal Cost Examples

  1. Example 1: Find the marginal cost of production if a company spent $20 on producing 2 units of output.

    Solution: Given, the cost of producing 2 units = $20. It implies, ΔC = $20 and ΔQ = 2. So, by using the formula, we get, MC = ΔC/ΔQ = $20/2 = $10. Therefore, the marginal cost of production is $10.

  2. Example 2: If a company makes 8 tablets, its total cost is $23,000. If it makes 9 tablets, its total cost is $24,800. Calculate the MC of the 9th tablet.

    Solution: For producing the 9th tablet, the company is spending $24800 – $23000 = $1800. Therefore, the marginal cost of the 9th tablet is $1800/1 = $1800.

  3. Example 3: Complete the table given below by finding the missing values.

    Quantity Total Cost (in $) Marginal Cost (in $) 0 20 — 1 35 ? 2 ? 10 3 53 ? 4 65 ?

    Solution: By using the marginal cost formula, the above table can be completed as,

    Quantity Total Cost (in $) Marginal Cost (in $) 0 20 — 1 35 15 2 45 10 3 53 8 4 65 12

Marginal Cost Practice Questions

FAQs on Marginal Cost

What is the Best Definition of Marginal Cost?

The definition of marginal cost states that it is the cost borne by the company to produce an additional unit of output. In other words, it is the change in the total production cost with the change in the quantity produced.

What is Marginal Cost in Economics?

In economics, marginal cost is a very important concept affecting the supply of the output of any company. It helps the firms in decision-making related to the effectiveness of the production of additional units of output.

What are Marginal Cost and Marginal Revenue?

When marginal cost is defined as the change in the cost of production by producing an additional unit of output, the marginal revenue states the change in the total revenue by selling an additional unit of output. Both marginal cost and marginal revenue are important factors determining the cost and selling price of the commodities to maximize profits.

What is the Formula of Marginal Cost?

The marginal cost formula is defined as the ratio of change in production cost to the change in quantity. Mathematically it can be expressed as ΔC/ΔQ, where ΔC denotes the change in the total cost and ΔQ denotes the change in the output or quantity produced.

How to Find Marginal Cost?

In calculus, marginal cost can be defined as the first derivative of the cost function with respect to the quantity/output. Or, to find marginal cost we can use the formula: MC = ΔC/ΔQ, where ΔC = change in production cost and ΔQ = change in quantity.

How to Find Total Cost from Marginal Cost?

To find the missing total cost from the marginal cost, we can use the following formula: MCn = (Cn – Cn-1)/(Qn – Qn-1). For example, if the total cost of producing 2 units is $4, and the MC of the 3rd unit is $2.5, then to find the total cost after producing the 3rd unit, we can apply these values in the above formula as:

MC = (C – $4)/(3 – 2)

2.5 = (C – $4)/1

C = $2.5 + $4

C = $6.5

Therefore, the total cost of production for 3 units is $6.5. This is how we can find the total cost from the marginal cost.

How Marginal Cost Helps in Decision Making?

Increasing marginal cost is an alarming indicator for companies to take relevant action to minimize it, as high marginal costs mean high costs of productions for every additional unit which will increase the expenses for a company. So, low marginal cost is an optimal stage of production. When the MC curve reaches its minimum level, it indicates that the company has reached its optimal level of production, and every additional unit after that could be a reason for an increase in the losses. This is how marginal cost helps in decision-making.

How to Find Variable Cost from Marginal Cost?

Marginal cost is the change in the total cost which is the sum of fixed costs and the variable costs. Fixed costs do not contribute to the change in the production level of the company and they are constant, so marginal cost depicts a change in the variable cost only. So, by subtracting fixed cost from the total cost, we can find the variable cost of production.

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