Marginal Cost

Marginal Cost Formula

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

The marginal cost formula is:

\(\hbox{Marginal Cost}=\frac{\hbox{Change in total cost}}{\hbox{Change in quantity of output}}\)

\(MC=\frac{\Delta TC}{\Delta QC}\)

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

How to calculate the marginal cost?

How can we calculate the marginal cost using the marginal cost formula? Simply, follow the example below.

Marginal Cost Example

Marginal cost (MC) is defined as the additional cost of producing one more unit of a good or service. For example, the table below depicts the production quantities and costs of a firm that produces orange juice.

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.

Marginal Cost Curve

The marginal cost curve is the graphical representation of the relationship between the marginal cost 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 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.

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.