Marginal cost

In economics and finance, marginal cost is the changes in total cost that arises when the quantity produced (or purchased) changes by one unit.

Related Topics:
Economics - Finance

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The use of this term usually implies that the cost per unit depends on the total number of units produced. For example, the marginal cost to go from producing 0 cars to producing 1 car is tremendous. The marginal cost at 100 cars—that is, the cost of producing the 101st car—is much lower, and the marginal cost at 10,000 cars is lower still (due to economies of scale).

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

However, when one factors in opportunity cost, it is possible for the marginal cost to increase with the total number of units produced. The resources used to produce extra cars (in this example) may be better spent elsewhere -- on endeavours with increasing marginal benefit as fewer resources are spent on them and more on producing cars. Knowing this, we see that the marginal cost curve is usually very similar in nature to that of the marginal cost curve depicted.

Related Topics:
Opportunity cost - Marginal benefit

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Mathematically, the marginal cost (MC) function is expressed as the derivative of the total cost (TC) function with respect to quantity (Q).

Related Topics:
Derivative - Total cost

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

MC=rac{dTC}{dQ}

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Marginal cost pricing is the business strategy of selling produced items at a point where their marginal cost equals their marginal benefit, or where an economic equilibrium exists. The idea is the marginal cost is the lowest price at which goods can be sold to keep the business "ticking over" in difficult economic conditions. Since the fixed costs are likely already sunk, marginal cost pricing should, in theory, allow the company to continue functioning without making a loss. Essentially, such methodology is essential in profit maximization goals of a firm.

Related Topics:
Business strategy - Economic equilibrium - Profit maximization

~ ~ ~ ~ ~ ~ ~ ~ ~ ~