Month End Glossary

Marginal Cost

The additional cost incurred to produce one extra unit of a good or service.

Marginal cost is a fundamental concept in economics and business that refers to the incremental cost of producing one additional unit of a good or service. It is calculated by taking the change in total production costs that comes from producing an additional unit, divided by the change in quantity produced. Typically, marginal cost initially decreases with increased production due to economies of scale, but after a certain point, it may begin to increase due to diminishing returns. For example, if a factory produces 100 units of a product at a cost of $1,000 and 101 units at $1,010, the marginal cost of the 101st unit is $10.

Understanding marginal cost is essential for decision-making in businesses, as it helps determine pricing and production levels. Companies aim to produce the quantity of output where marginal cost equals marginal revenue, as this maximizes profit. For instance, a firm may decide to produce an additional smartphone if the marginal cost of producing the phone is less than the marginal revenue they expect to earn from selling it. In this way, marginal cost analysis supports efficient and profitable production planning.

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