Marginal Cost

In economics and finance, marginal cost is the change in the total

cost that arises when the quantity produced has an increment by unit.
That is, it is the cost of producing one more unit of a good. [1] In general
terms, marginal cost at each level of production includes any additional
costs required to produce the next unit. For example, if producing
additional vehicles requires building a new factory, the marginal cost of
the extra vehicles includes the cost of the new factory. In practice, this
analysis is segregated into short and long-run cases, so that over the
longest run, all costs become marginal. At each level of production and
time period being considered, marginal costs include all costs that vary
with the level of production, whereas other costs that do not vary with
production are considered fixed.

If the good being produced is infinitely divisible, so the size of a

marginal cost will change with volume, as a non-linear and nonproportional cost function includes the following:
variable terms dependent to volume,

constant terms independent to volume and occurring with the

respective lot
size,

jump fix cost increase or decrease dependent to steps of volume

increase.

In practice the above definition of marginal cost as the change in total

cost as a result of an increase in output of one unit is inconsistent with
the differential definition of marginal cost for virtually all non-linear
functions. This is as the definition finds the tangent to the total cost
curve at the point q which assumes that costs increase at the same
rate as they were at q. A new definition may be useful for marginal unit
cost (MUC) using the current definition of the change in total cost as a
result of an increase of one unit of output defined as: TC(q+1)-TC(q)
and re-defining marginal cost to be the change in total as a result of an

infinitesimally small increase in q which is consistent with its use in

economic literature and can be calculated differentially.
If the cost function is differentiable joining, the marginal cost is the
cost of the next unit produced referring to the basic volume.

If the cost function is not differentiable, the marginal cost can be

expressed as follows.

A number of other factors can affect marginal cost and its applicability
to real world problems. Some of these may be considered market
failures. These may include information asymmetries, the presence of
negative
or
positive externalities,transaction
costs, price
discrimination and others.
Cost functions and relationship to average cost
In the simplest case, the total cost function and its derivative are
expressed as follows, where Q represents the production quantity, VC
represents variable costs, FC represents fixed costs and TC represents
total costs.

Since (by definition) fixed costs do not vary with production quantity, it
drops out of the equation when it is differentiated. The important
conclusion is that marginal cost is not related to fixed costs. This can
be compared with average total cost or ATC, which is the total cost
divided by the number of units produced and does include fixed costs.

For discrete calculation without calculus, marginal cost equals the

change in total (or variable) cost that comes with each additional unit
produced. In contrast, incremental cost is the composition of total
cost from the surrogate of contributions, where any increment is
determined by the contribution of the cost factors, not necessarily by
single units.

For instance, suppose the total cost of making 1 shoe is $30 and the
total cost of making 2 shoes is $40. The marginal cost of producing the
second shoe is $40 $30 = $10.
Marginal cost is not the cost of producing the "next" or "last" unit. [2] As
Silberberg and Suen note, the cost of the last unit is the same as the
cost of the first unit and every other unit. In the short run, increasing
production requires using more of the variable input conventionally
assumed to be labor. Adding more labor to a fixed capital stock
reduces the marginal product of labor because of the diminishing
marginal returns. This reduction in productivity is not limited to the
additional labor needed to produce the marginal unit - the productivity
of every unit of labor is reduced. Thus the costs of producing the
marginal unit of output has two components: the cost associated with
producing the marginal unit and the increase in average costs for all
units produced due to the damage to the entire productive process
(AC/q)q. The first component is the per unit or average cost. The
second unit is the small increase in costs due to the law of diminishing
marginal returns which increases the costs of all units of
sold. Therefore, the precise formula is: MC = AC + (AC/q)q.
Marginal costs can also be expressed as the cost per unit of labor
divided by the marginal product of labour. [3]

Because
change

is the change in quantity of labor that affects a one unit

in

output,

this

implies

that

this

equals

[4]
Therefore
Since the wage rate is assumed constant,
marginal cost and marginal product of labor have an inverse
relationshipif marginal cost is increasing (decreasing) the marginal
product of labor is decreasing (increasing).[5]

Economies of scale
Economies of scale is a concept that applies to the long run, a span of
time in which all inputs can be varied by the firm so that there are no

fixed inputs or fixed costs. Production may be subject to economies of

scale (or diseconomies of scale). Economies of scale are said to exist if
an additional unit of output can be produced for less than the average
of all previous units that is, if long-run marginal cost is below longrun average cost, so the latter is falling. Conversely, there may be
levels of production where marginal cost is higher than average cost,
and average cost is an increasing function of output. For this generic
case, minimum average cost occurs at the point where average cost
and marginal cost are equal (when plotted, the marginal cost curve
intersects the average cost curve from below); this point will not be at
the minimum for marginal cost if fixed costs are greater than 0.

How to Calculate Marginal Cost

Marginal cost is a figure calculated from production costs for a short
period of time. It takes into account the output and the total cost. To
properly plot marginal cost, you will need to chart the output and costs
on a spreadsheet and then use a formula to calculate the marginal
cost. Follow these steps to calculate marginal cost.
Part 1 of 4: Preparation

1.

1
Gather the data related to your production for a given period.

You will need inventory statistics like total output. You will
also need the fixed costs, variable costs and total costs for a given
quantity production (output).

Ad
Part 2 of 4: Chart Production

1.

1
Chart the total cost and output on a spreadsheet. Consider the
following columns in your spreadsheet:

Use the header "Output" in your first column. You can fill the
rows with single unit increases in output or larger jumps. For instance,
it may be numbered 1,2,3, etc. or it can be numbered in larger
increments, such as 1000, 2000, 3000, etc.
Consider whether you want to simply add "Total Cost" or
add 3 columns for "Fixed Cost," "Variable Cost" and "Total Cost." If you
do not want to include the numbers for fixed and variable cost, make
sure both these figures are calculated in the total cost.
Type the correct "Total Cost" figures for each rise in output.
You will be able to figure out marginal cost for each increase in output
based on these figures.

2
Save your spreadsheet frequently while entering data.
Part 3 of 4: Calculate Marginal Cost

1.

1
Add a column next to Total Cost labeled "Marginal Cost." You will
figure out the marginal cost for each level of output separately.

Keep in mind that marginal cost is based on the changes in

cost as you produce more. The figures will plot change in output and
cost throughout your chart.

2
Write down the formula. To calculate marginal cost, you will need to
take the change in total cost divided by the change in total output.

3
Take the first 2 rows of your chart. Subtract the total cost of the
first row (after headings) by the total cost of the second row. This is
your change in total cost.

4
Subtract the total output of the first row by the total output of
the second row.This is your change in total output.

5
Enter the data into your formula.

For example, if your first row of data shows total output of

1,000 for a cost of $8,000 and the second row of data shows a total
output of 2,000 for a cost of $12,000, your formula would be marginal
cost=$12,000-$8,000)/(2,000-1,000).

6
Simplify to solve the problem.

In
our
example,
we
simplify
cost=$4,000/1,000 or marginal cost=$4.

Part 4 of 4: Chart Marginal Cost

to

get

marginal

1.

1
Enter your marginal cost into the row next to your second set
of data. The first row of data will not have a marginal cost, because
marginal cost cannot be calculated based on an output of zero.

2.

2
Continue to calculate the marginal cost between each row of
data and the set above it.

If you are using Microsoft Excel, you can include a formula

to automatically calculate the data. Enter an equals sign in the blank
box under your marginal cost column, then replace the data numbers
with cell numbers. For example, "=(F4-F3)/(G4-G3)." Then click "Enter."
Drag the formula down the column to reproduce it in each row.