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Home Cost Analysis Marginal Cost (MC)

Marginal Cost (MC):

 

Definition:

 

Marginal Cost is an increase in total cost that results from a one unit increase in output. It is defined as:

 

"The cost that results from a one unit change in the production rate".

 

Example:

 

For example, the total cost of producing one pen is $5 and the total cost of producing two pens is $9, then the marginal cost of expanding output by one unit is $4 only (9 - 5 = 4).

 

The marginal cost of the second unit is the difference between the total cost of the second unit and total cost of the first unit. The marginal cost of the 5th unit is $5. It is the difference between the total cost of the 6th unit and the total cost of the, 5th unit and so forth.

 

Marginal Cost is governed only by variable cost which changes with changes in output. Marginal cost which is really an incremental cost can be expressed in symbols.

 

Formula:

Marginal Cost = Change in Total Cost = ΔTC

                                                                          Change in Output        Δq

 

The readers can easily understand from the table given below as to how the marginal cost is computed:

 

Schedule:

 

Units of Output

Total Cost (Dollars)

Marginal Cost (Dollars)

1

5

5

2

9

4

3

12

3

4

16

4

5

21

5

6

29

8

 

Graph/Diagram:

 

 

MC curve, can also be plotted graphically. The marginal cost curve in fig. (13.8) decreases sharply with smaller Q output and reaches a minimum. As production is expanded to a higher level, it begins to rise at a rapid rate. 

 

Long Run Marginal Cost Curve:

 

The long run marginal cost curve like the long run average cost curve is U-shaped. As production expands, the marginal cost falls sharply in the beginning, reaches a minimum and then rises sharply.

 

Relationship Between Log Run Average Cost and Marginal Cost:

 

The relationship between the long run average total cost and log run marginal cost can be understood better with the help of following diagram:

 

 

It is clear from the diagram (13.9), that the long run marginal cost curve and the long run average total cost curve show the same behavior as the short run marginal cost curve express with the short run average total cost curve. So long as the average cost curve is falling with the increase in output, the marginal cost curve lies below the average cost curve.

 

When average total cost curve begins to rise, marginal cost curve also rises, passes through the minimum point of the average cost and then rises. The only difference between the short run and long run marginal cost and average cost is that in the short run, the fall and rise of curves LRMC is sharp. Whereas In the long run, the cost curves falls and rises steadily.      

Relevant Articles:

Concept of Cost of Production
Concepts of Economic Costs

Analysis of Short Run Cost of Production

Average Cost
Short Run and Long Run Average Cost Curves
Marginal Cost
Relation of Average Variable Cost and Average Total Cost to Marginal Cost
 

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