Answers the Question
How much would it cost to produce one more item?
Calculator for Marginal Cost
What Is the Marginal Cost?
Many businesses do whatever they can to minimize their costs of production.
The marginal cost is the measure of how much a company must pay to create exactly one additional good, beyond those already built.
Sometimes each unit of good costs the same amount to produce; this is often true in the service world.
If I were to hire an editor, it would take him ten times as much effort to edit ten pages as it would for him to edit one. In his case, his costs increase at the same rate as the quantity of work he takes on.
At the extreme, a vendor might have completely fixed costs. For instance, an author may spend a significant amount of money to pay a writer to create an ebook. Once that ebook has been written, however, it costs almost nothing to produce an additional copy for sale.
The more a business spends on fixed costs like factories, research, and analysis, the lower the additional cost to produce another unit.
Most goods incur a mixture of variable and fixed costs of production. The greater the percentage of fixed costs, the lower the marginal cost of production.
Why Is it Important?
- Knowing when to stop. As soon as the marginal cost of production equals the price that it fetches in the marketplace, it no longer makes sense to produce any more.
- Knowing when to make more. If the marginal cost of production keeps getting smaller (and demand from consumers is still there), there is a likelihood for a natural monopoly.
Formula(s) to Calculate Marginal Cost
- CHANGE IN COST / CHANGE IN QUANTITY
- Many people assume that marginal cost is constant, no matter the quantity of goods produced. Often firms will find that their marginal costs are very high when few items are produced, and will rise again when quantities produced become quite large. Don't forget factories have maximum production capabilities. Once a firm attempts to create a quantity higher than its limit, new and less efficient contingencies will have to be explored