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

where any increment is determined by the contribution of the cost factors. the presence of negative or positive externalities. A number of other factors can affect marginal cost and its applicability to real world problems. Since (by definition) fixed costs do not vary with production quantity. price discrimination and others. not necessarily by single units. the marginal cost can be expressed as follows. which is the total cost divided by the number of units produced and does include fixed costs. Some of these may be considered market failures. incremental cost is the composition of total cost from the surrogate of contributions. In contrast. FC represents fixed costs and TC represents total costs. This can be compared with average total cost or ATC. The important conclusion is that marginal cost is not related to fixed costs. If the cost function is not differentiable. Cost functions and relationship to average cost In the simplest case. For discrete calculation without calculus. the total cost function and its derivative are expressed as follows. If the cost function is differentiable joining. VC represents variable costs. These may include information asymmetries. it drops out of the equation when it is differentiated.infinitesimally small increase in q which is consistent with its use in economic literature and can be calculated differentially. the marginal cost is the cost of the next unit produced referring to the basic volume.transaction costs. marginal cost equals the change in total (or variable) cost that comes with each additional unit produced. where Q represents the production quantity. .

Adding more labor to a fixed capital stock reduces the marginal product of labor because of the diminishing marginal returns. The first component is the per unit or average cost. increasing production requires using more of the variable input — conventionally assumed to be labor. marginal cost and marginal product of labor have an inverse relationship—if marginal cost is increasing (decreasing) the marginal product of labor is decreasing (increasing). Marginal costs can also be expressed as the cost per unit of labor divided by the marginal product of labour. this implies that this equals . 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 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. This reduction in productivity is not limited to the additional labor needed to produce the marginal unit . [2] As Silberberg and Suen note. [4] Therefore Since the wage rate is assumed constant. the cost of the last unit is the same as the cost of the first unit and every other unit. Therefore. Marginal cost is not the cost of producing the "next" or "last" unit.For instance. [3] Because change is the change in quantity of labor that affects a one unit in output. the precise formula is: MC = AC + (∂AC/∂q)q.[5] Economies of scale Economies of scale is a concept that applies to the long run. The marginal cost of producing the second shoe is \$40 – \$30 = \$10. a span of time in which all inputs can be varied by the firm so that there are no . suppose the total cost of making 1 shoe is \$30 and the total cost of making 2 shoes is \$40. In the short run.the productivity of every unit of labor is reduced.

so the latter is falling. this point will not be at the minimum for marginal cost if fixed costs are greater than 0. 1 Gather the data related to your production for a given period. you will need to chart the output and costs on a spreadsheet and then use a formula to calculate the marginal cost. Production may be subject to economies of scale (or diseconomies of scale). For this generic case. It takes into account the output and the total cost. You will also need the fixed costs. Follow these steps to calculate marginal cost. if long-run marginal cost is below longrun average cost. the marginal cost curve intersects the average cost curve from below). To properly plot marginal cost. minimum average cost occurs at the point where average cost and marginal cost are equal (when plotted. and average cost is an increasing function of output. there may be levels of production where marginal cost is higher than average cost. Conversely. .  You will need inventory statistics like total output. Part 1 of 4: Preparation 1. 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. variable costs and total costs for a given quantity production (output). How to Calculate Marginal Cost Marginal cost is a figure calculated from production costs for a short period of time.fixed inputs or fixed costs.

such as 1000." If you do not want to include the numbers for fixed and variable cost. You will be able to figure out marginal cost for each increase in output based on these figures.3. For instance. You can fill the rows with single unit increases in output or larger jumps. etc. . or it can be numbered in larger increments. etc. 2000. Type the correct "Total Cost" figures for each rise in output. 1 Chart the total cost and output on a spreadsheet. 3000.2. make sure both these figures are calculated in the total cost. Consider the following columns in your spreadsheet:     Use the header "Output" in your first column. Consider whether you want to simply add "Total Cost" or add 3 columns for "Fixed Cost.Ad Part 2 of 4: Chart Production 1." "Variable Cost" and "Total Cost. it may be numbered 1.

 2 Write down the formula.2 Save your spreadsheet frequently while entering data. The figures will plot change in output and cost throughout your chart. 1 Add a column next to Total Cost labeled "Marginal Cost. .  Keep in mind that marginal cost is based on the changes in cost as you produce more. Part 3 of 4: Calculate Marginal Cost 1." You will figure out the marginal cost for each level of output separately. you will need to take the change in total cost divided by the change in total output. To calculate marginal cost.

This is your 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.

 For example.000.000).000-\$8.000)/(2. your formula would be marginal cost=\$12.000/1. Part 4 of 4: Chart Marginal Cost to get marginal . 5 Enter the data into your formula.000 for a cost of \$12.000 and the second row of data shows a total output of 2.  In our example.000 for a cost of \$8. if your first row of data shows total output of 1. we simplify cost=\$4.000 or marginal cost=\$4.  6 Simplify to solve the problem.000-1.

because marginal cost cannot be calculated based on an output of zero. .1. Enter an equals sign in the blank box under your marginal cost column. The first row of data will not have a marginal cost." Drag the formula down the column to reproduce it in each row. then replace the data numbers with cell numbers. 1 Enter your marginal cost into the row next to your second set of data. you can include a formula to automatically calculate the data. 2. For example." Then click "Enter. 2 Continue to calculate the marginal cost between each row of data and the set above it. "=(F4-F3)/(G4-G3).  If you are using Microsoft Excel.