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Marginal Cost

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Marginal Cost

Firms produce and sell a variety of goods in different market structures and their main goal is to maximize their profit. The cost of production is an important factor that firms have to consider. In this article, we will learn all about one type of cost: marginal cost. Ready to deep dive? Let’s go!

Marginal Cost Definition

Let's start with a marginal cost definition. Marginal cost is the marginal change in total cost caused by producing one more unit of product. We can calculate the marginal cost by dividing the change in total cost by the change in the quantity of output.

Marginal cost (MC) is the additional cost of producing one more unit of a good or service. In other words, the change in the total cost for production when you decide to produce one more unit of a good is the marginal cost of producing that extra unit.

Marginal Cost Equation

The marginal cost equation is important for firms since it shows them how much each additional unit of output costs them.

Remember, average cost shows the cost per output unit.

We can calculate the marginal cost using the following equation, where ΔTC stands for the change in total cost and ΔQ means the change in the quantity of output.

We can now generate a marginal cost equation:

How can we calculate the marginal cost using the marginal cost equation?

With the marginal cost equation, we can find the per unit marginal cost of producing more products.

Let's say the Willy Wonka chocolate firm produces chocolate bars. For example, if producing 5 more units of chocolate bars leads to an overall increase in the total cost by $40, the marginal cost of producing each of those 5 bars would be .

Marginal Cost Example

Let's look at a marginal cost example. The table below depicts the production quantities and costs of a firm that produces orange juice.

Quantity of Orange Juice (Bottles)Fixed Cost of Production ($)Variable Cost of Production ($)Total Cost of Production ( $)Marginal Cost ( $)
0100 0 100 -
1100 1511515
2100 28 128 13
3100 38 138 10
4100 55 155 17
5100 73 173 18
6100 10820835

Table 1. Marginal Cost Example

In Table 1 above, the fixed, variable, total, and marginal cost associated with each bottle of orange juice is shown. When the company goes from producing 0 bottles of juice to 1 bottle of juice, the change in their total cost is $15 ($115 - $100), which is the marginal cost of producing that first bottle of juice.

When producing the second bottle of juice, that bottle of juice causes an additional $13 in costs, which can be calculated by subtracting the total cost of production of producing 1 bottle of juice from 2 bottles of juice ($128 - $115). Thus, the marginal cost of producing the second bottle of juice is $13.

Notice that the change in the total cost of production is equal to the change in variable cost because the fixed cost does not change as the quantity produced changes. So, you can also use the change in the total variable cost to calculate the marginal cost if the total cost is not given, or if a change in variable cost is easier to calculate. Remember, we are not dividing the total cost itself by the number of total units produced, we are dealing with the changes in both.

Marginal Cost Curve

The marginal cost curve graphically presents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm.

The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities. This means marginal cost declines by increasing the number of goods produced and reaches a minimum value at some point. Then it starts to increase after its minimum value has been reached. Figure 1 below shows a typical marginal cost curve.

marginal cost curve studysmarterFigure 1. Marginal Cost Curve, StudySmarter Originals

Marginal Cost Function

In Figure 1, we can see the marginal cost function, which illustrates how the marginal cost changes with different levels of quantity. The quantity is shown on the x-axis, whereas the marginal cost in dollars is given on the y-axis.

Marginal Cost and Average Total Cost

The relationship between the marginal cost and average total cost is also important for firms.

marginal cost average total cost studysmarterFigure 2. Marginal Cost and Average Total Cost, StudySmarter Originals

Because the point where the marginal cost curve intersects the average total cost curve shows the minimum-cost output. In Figure 2 above, we can see the marginal cost curve (MC) and the average total cost curve (ATC). The corresponding minimum-cost output point is Q in Figure 2. Further, we also see that this point corresponds to the bottom of the average total cost curve, or the minimum ATC.

This is in fact a general rule in the economy: the average total cost equals marginal cost at the minimum-cost output.

Marginal Cost - Key takeaways

  • Marginal Cost is the change in total cost caused by producing one more unit of product.
  • We can calculate the marginal cost by dividing the change in total cost by the change in the quantity of output.
  • The marginal cost curve graphically represents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm.
  • The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities.
  • The point where the marginal cost curve intersects the average total cost curve shows the minimum-cost output.

Frequently Asked Questions about Marginal Cost

Marginal Cost is the change in total cost caused by producing one more unit of product.

The marginal cost is the change in total production cost that comes from making or producing one additional unit. Marginal revenue, on the other hand, is the increase in revenue that comes from the sale of one additional unit.

We can calculate the marginal cost by dividing the change in total cost by the change in the quantity of output.


We can calculate the marginal cost by dividing ΔTC (which stands for the change in total cost) by ΔQ (which stands for the change in the quantity of output).



The marginal cost curve graphically represents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm.


Final Marginal Cost Quiz

Question

What is marginal cost?

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Answer

Marginal Cost is the change in total cost caused by producing one more unit of product.

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Question

What is the difference between marginal cost and marginal revenue?

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Answer

The marginal cost is the change in total production cost that comes from making or producing one additional unit. Marginal revenue, on the other hand, is the increase in revenue that comes from the sale of one additional unit.


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Question

How to calculate the marginal cost?

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Answer

We can calculate the marginal cost by dividing the change in total cost by the change in the quantity of output.


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Question

What is the formula for marginal cost?

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Answer

We can calculate the marginal cost by dividing ΔTC (which stands for the change in total cost) by ΔQ (which stands for the change in the quantity of output).


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Question

What is the marginal cost curve?

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Answer

The marginal cost curve graphically represents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm.


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Question

What is the minimum-cost output?

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Answer

The point where the marginal cost curve intersects the average total cost curve shows the minimum-cost output.


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Question

The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities. 


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Answer

True

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Question

We are not dividing the total cost itself by the number of total units produced to find the marginal cost. 


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Answer

False

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Question

The marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced.

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Answer

True

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Question

Quantity of orange juice (bottles)Fixed Cost of ProductionVariable Cost of ProductionTotal Cost of ProductionMarginal Cost
0100 $0 $100 $-
1100 $12 $112 $A
2100 $25 $125 $B
3100 $39 $139 $C


According to this table, what is the value of A?


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Answer

12

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Question

Quantity of orange juice (bottles)Fixed Cost of ProductionVariable Cost of ProductionTotal Cost of ProductionMarginal Cost
0100 $0 $100 $-
1100 $12 $112 $A
2100 $25 $125 $B
3100 $39 $139 $C


According to the table, what is the value of the B?


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Answer

13

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Question

Quantity of orange juice (bottles)Fixed Cost of ProductionVariable Cost of ProductionTotal Cost of ProductionMarginal Cost
0100 $0 $100 $-
1100 $12 $112 $A
2100 $25 $125 $B
3100 $39 $139 $C


What is the value of C?


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Answer

14

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Question

The average cost is always larger than the marginal cost.

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Answer

False

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Question

The change in the total cost of production is equal to the change in variable cost because the fixed cost does not change as the quantity produced changes.

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Answer

True

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Question

What is ΔTC in the marginal cost equation?

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Answer

ΔTC stands for the change in total cost.

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Question

What is ΔQ in the marginal cost equation?

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Answer

ΔQ stands for the change in the quantity of output.

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Question

________ ____ is the change in total cost caused by producing one more unit of product.

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Answer

marginal cost

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Question

Marginal cost can be calculated by dividing the change in _____ ____ by the change in the ______.

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Answer

total cost, output

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Question

Marginal cost (MC) is the additional cost of producing how many more units of output:

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Answer

one

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Question

If a firm increases its output by 2 units, and its total cost increases by $10, what is the firm's marginal cost for this increase in production?

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Answer

$5

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Question

MC is calculated by dividing the change in what variable, by the change in Quantity of Output.

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Answer

Total Cost

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If Total Cost increases by $500, how much would the change in Quantity of Output need to be, in order for MC to be $25?

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Answer

20

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Question

If a firm increases its output by 700 units, how much will its Total Cost have to increase by in order for MC to equal $2.50

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Answer

$1,750

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Question

The level of output where marginal cost intersects average total cost is the:

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Answer

minimum cost output

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Question

If firm A increases its quantity of output by 10 units and its total cost increases by $200, and firm B increases its quantity of output by 15 units and its total cost increases by $375, which firm has a MC of $25?

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Answer

Firm B

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Question

If an orange juice company has a fixed cost of $50, it increases its output from 5 units to 7 units, and its variable cost increases from $73 to $138, what is its new Total Cost?

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Answer

$188

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Question

If an orange juice company has a fixed cost of $50, it increases its output from 5 units to 7 units, and its variable cost increases from $73 to $138, what is its Marginal Cost?

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Answer

$94

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Question

If an orange juice company has a fixed cost of $50, it increases its output from 5 units to 7 units, and its variable cost increases from $73 to $138, how much has its Average Total Cost increased by?

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Answer

$2.26

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Question

The marginal cost curve represents the relationship between marginal cost and the ______ produced by this firm.

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Answer

output

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Question

Generally speaking, Total Cost is equal to _____ ____ plus _______ ____.

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Answer

fixed cost, variable cost

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Question

If a firm increases production from 1,221 units to 1,487 units, and its total cost increases from $109,453 to $217,380, what is the MC associated with this increase?

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Answer

$405.74

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Question

If a firm has a fixed cost of $10, it increases its output from 1 to 2 units, and its total cost increases from $15 to $18, what was its MC at 1 unit of output, and what is its MC at 2 units of output?

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Answer

$5, $3

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Question

If a firm has a fixed cost of $10, it increases its output from 1 to 2 units, and its total cost increases from $15 to $18, how much has its MC changed by?

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Answer

-$2

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