Marginal cost

Marginal cost is the cost incurred by producing one more unit of a product or service. It is derived from the variable cost of production, given that fixed costs do not change with the quantity of output. Marginal cost is an important concept in economic theory because it is used to determine the amount of output a firm should produce to maximize profit.

Definition

The economic definition of marginal cost is the increase in total cost that arises from an extra unit of production. In other words, it is the cost of producing one more unit of a good or service. This concept is used in the theory of the firm to understand the relationship between cost and output, and to determine the optimal level of production.

Calculation

The marginal cost of production can be calculated by dividing the change in total cost by the change in quantity. This is represented by the formula:

MC = ΔTC / ΔQ

where:

• MC is the marginal cost
• ΔTC is the change in total cost
• ΔQ is the change in quantity

Relationship with Average Cost

The relationship between marginal cost and average cost is an important concept in economic theory. When marginal cost is below average cost, average cost is decreasing. When marginal cost is above average cost, average cost is increasing. This relationship is known as the marginal cost-average cost relationship.

Importance in Economic Theory

Marginal cost is a fundamental concept in economic theory. It is used to determine the optimal level of production for a firm. According to the principle of profit maximization, a firm should produce up to the point where marginal cost equals marginal revenue. This is known as the profit-maximizing level of output.

See Also

• Economics
• Cost
• Production
• Profit maximization

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