Marginal Cost Formula
Calculate the cost of producing one additional unit.
Essential for pricing decisions and profit maximization.
The Formula
MC = ΔTC / ΔQ
Marginal cost is the additional cost incurred by producing one more unit of output. It helps businesses determine the optimal level of production for maximum profit.
Variables
| Symbol | Meaning |
|---|---|
| MC | Marginal cost (cost per additional unit) |
| ΔTC | Change in total cost |
| ΔQ | Change in quantity produced |
Example 1
Total cost rises from $10,000 to $10,800 when production increases from 100 to 110 units
ΔTC = $10,800 - $10,000 = $800
ΔQ = 110 - 100 = 10
MC = 800 / 10
MC = $80 per unit
Example 2
A bakery's cost goes from $2,500 to $2,540 when making 1 more cake
ΔTC = $2,540 - $2,500 = $40
ΔQ = 1
MC = $40 (the cost of producing one more cake)
When to Use It
Use the marginal cost formula when:
- Deciding whether to increase production
- Setting prices that cover the cost of additional output
- Finding the profit-maximizing quantity (where MC = marginal revenue)
- Analyzing economies or diseconomies of scale