Marginal Cost

In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. If the good being produced is infinitely divisible, so the size of a marginal cost will change with volume, as a non-linear and non-proportional 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.

In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory. In practice, the analysis is segregated into short and long-run cases, and over the longest run, all costs are marginal. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, and other costs are considered fixed costs.

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.

Read more about Marginal Cost:  Cost Functions and Relationship To Average Cost, Economies of Scale, Perfectly Competitive Supply Curve, Decisions Taken Based On Marginal Costs, Relationship To Fixed Costs, Externalities

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Mohring Effect
... Because waiting time forms part of the costs of transportation, the Mohring effect implies increasing returns to scale for scheduled urban transport services ... the grounds that subsidy is required to achieve marginal cost pricing when the Mohring effect is relevant ... The average cost of a passenger-journey includes the average waiting time, while the marginal cost includes only the average waiting time less the diminution in total waiting time caused by the ...
Monopoly Profit
... competitive situation, the price the firm gets for its product is exactly the same as the Marginal cost of producing the product ... about losing customers to competitors, it can set a price that is significantly higher the Marginal (Economic) cost of producing (the last unit of) the product ... price and output are co-determined by consumer demand and the firm's production cost structure ...
Marginal Cost - Externalities - Social Costs
... Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs ... The marginal private cost shows the cost associated to the firm in question ... It is the marginal private cost that is used by business decision makers in their profit maximization goals, and by individuals in their purchasing and consumption choices ...
Minimum Efficient Scale - Relationship To Average Cost and Marginal Cost
... can be computed is by equating Average Cost (AC) with the Marginal Cost (MC) ... a smaller number of units, its Average Cost per unit is high because a bulk of the costs come from Fixed Costs ... As a firm produces more units, the Average Cost incurred per unit will tend to "average out" and move towards the cost it takes to produce each additional unit (Marginal Cost) ...
Partial Equilibrium - Applications
... In the short run Marginal Revenue = Marginal Cost ... Algebraically MR=MC And in long run Long run Marginal Cost = Marginal Revenue = Average Revenue = Long run Average Cost Algebraically LMC=MR=AR=LAC ... All the firms produces till that level where Marginal Cost=Marginal Revenue, and sells the product at market price ruling at that point of time ...

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