Marginal Cost

What is this formula?

Marginal Cost measures the additional cost incurred by producing one more unit of output.

It is one of the most important concepts in microeconomics because it helps firms determine optimal production levels and pricing decisions.

When to use it

Use this formula when analyzing production efficiency, cost behavior, profit maximization, and business decision-making.

Example

Initial production:

Q1 = 100 units

Final production:

Q2 = 120 units

Initial total cost:

TC1 = 5,000 USD

Final total cost:

TC2 = 5,600 USD

Formula:

MC = (TC2−TC1)/(Q2−Q1)

Substitution:

MC = (5600−5000)/(120−100)

MC = 600/20

MC = 30 USD/unit

Result:

Each additional unit produced costs approximately 30 USD.

Applications

- Production planning

- Profit maximization

- Cost analysis

- Managerial economics

- Pricing decisions

Note

This formula calculates marginal cost over a finite change in output and therefore represents an average marginal cost over the interval. In economic theory, marginal cost is often defined as the derivative of total cost with respect to output, but this discrete version is more practical for real-world business calculations.