Marginal Cost

Marginal Cost:

Marginal cost is stated as the addition made to the net cost by the production of one extra unit of output.

Table: Computation of marginal cost

1120_marginal cost1.jpg

For illustration whenever a firm generates 100 units of output, the marginal cost would be equivalent to the total cost of generating 100 units minus the total cost of producing 99 units.

Let’s assume the net cost of producing 99 units is $ 9000 and the total cost of generating 100 units is $ 10,000 then the marginal cost will be $10, 000 – $ 9,000 = $ 1,000. The firm has acquired a sum of $ 1,000 in the production of one more unit of the commodity. Symbolically,

MCn = TCn – TCn-1

Here,

MCn = Marginal cost
TCn = Total cost of producing n units
TC n-1 = Total cost of generating n-1 units

The marginal cost curve is shown below:

1206_marginal cost2.jpg

The marginal cost curve is ‘U’ shaped. Shape of the cost curve is determined by the law of variable proportions. When increasing returns (i.e., economies of scale) is in operation, the marginal cost curve will be diminishing, as the cost will be reducing with the rise in output. Whenever the diminishing returns (i.e., diseconomies of scale) are in operation, the MC curve will be rising as it is the condition of rising cost.

 

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