Marginal Cost
The added cost of producing one more unit of output.
Formula
Variables
Example
TC rises $500 for 100 more units: MC = $5
How it works
Marginal cost measures how much total production cost changes when output increases by a small amount, so it tells you the cost of the next unit or batch of units. It comes from comparing the change in total cost to the change in quantity: if costs rise quickly as production expands, marginal cost is high; if costs barely change, marginal cost is low. Businesses use it because the cost of one more unit is a key signal for pricing, production planning, and profit decisions.
When to use it
Use this formula when analyzing production, especially to see whether making additional units is still economical. It appears in business, economics, and operations problems involving factory output, service capacity, or cost control.
Worked example, step by step
A bakery’s total cost increases from $1,200 to $1,380 when output rises from 60 cakes to 75 cakes. Step 1: Find the change in total cost: ΔTC = 1,380 - 1,200 = 180 Step 2: Find the change in quantity: ΔQ = 75 - 60 = 15 Step 3: Divide the cost change by the quantity change: MC = ΔTC / ΔQ = 180 / 15 Step 4: Calculate: MC = $12 Final answer: The marginal cost is $12 per cake.
Common mistakes to avoid
- Using total cost instead of the change in total cost
- Forgetting to divide by the change in quantity
- Treating marginal cost as always constant for every level of output
Did You Know?
Profit is maximized where marginal cost equals marginal revenue — the single most important rule in microeconomics.
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