Marginal Cost
What is Marginal Cost?
Marginal Cost is the additional cost incurred by producing one more unit of output.
It is calculated as the change in total cost divided by the change in quantity. Marginal cost typically decreases at first due to increasing marginal returns, then rises due to diminishing returns.
Marginal Cost: a worked example
A candle maker's total cost schedule reads $50 at zero units, $80 at 1 unit, $102 at 2, $130 at 3, $170 at 4, and $220 at 5. Marginal cost is the change in total cost divided by the change in quantity, so the first candle costs $80 minus $50, which is $30. The second costs $22, the third $28, the fourth $40, and the fifth $50. Marginal cost falls and then rises, the familiar U. The same formula handles jumps in quantity: moving from 4 units to 6 units lifts total cost from $170 to $280, so marginal cost averages $110 ÷ 2 = $55 per unit. At a market price of $40 the maker stops at 4 units, because the fourth candle's marginal cost is exactly $40 while the fifth costs $50, more than that candle would earn.
The mistake students make with marginal cost
Under time pressure students divide total cost by quantity and label the result marginal cost, but that calculation produces average total cost. The phrase cost per unit sits behind both terms, which is why the swap happens so often. Marginal cost is a difference, not a ratio of levels: take the new total cost, subtract the previous total cost, then divide by the change in quantity. A useful check is that the two measures are equal only at the minimum point of the average total cost curve.
Marginal Cost questions
How do you calculate marginal cost from a table?
Subtract the total cost at the previous quantity from the total cost at the new quantity, then divide by the change in quantity. Moving from 7 units at $310 to 8 units at $348 gives a marginal cost of $38. When a table skips quantities, for instance 10 units at $500 and 15 units at $620, divide the $120 increase by the 5 extra units to get $24 per unit.
Does marginal cost include fixed costs?
Marginal cost contains no fixed cost at all, because a fixed amount stays identical when output changes by one unit and therefore cancels out of the change in total cost. Adding $500 of insurance shifts the total cost curve upward at every quantity while leaving the marginal cost curve exactly where it was. Only variable inputs such as labor and materials show up in marginal cost.
Why is the marginal cost curve U-shaped?
Marginal cost falls at low output because early workers specialize and each one adds more output than the last, which lowers the cost of the next unit. Once diminishing marginal returns arrive, each additional worker adds less output, so another unit takes more labor and marginal cost climbs. The rising portion then cuts through the minimum points of average variable cost and average total cost.
Formula / Example
This is the live Production Costs sandbox. Drag the curves, or open the full version.
Related terms
The same idea in another course
The derivative, in calculus termsMarginal cost is the derivative of total cost with respect to quantity, so the marginal cost curve is the slope of the total cost curve. On CalcLearn, a sister site.
Common comparisons
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