marginal cost

Summary

The extra cost a business pays to make one more unit of a product.

• if 10 toys cost $100 to make and 11 cost $108, the marginal cost is $8

Formula

$$\text{marginal cost}=\frac{\text{change in total cost}}{\text{change in quantity}}$$

Applications

• mostly variable costs like raw material and labour
• fixed costs like rent don’t change by quantity of product made

Relevance

• finding profit limits – companies maximise profit when marginal cost = marginal profit
  • marginal profit: extra money made from selling that one item
• spotting efficiency
  • early on, making more items can lower costs due to efficiency
  • later, costs rise because of crowding or tired workers – diminishing returns