Marginal Cost

Marginal cost is the additional cost incurred by producing one more unit of a good or service. It represents the change in total production costs that comes from increasing production by a single unit. Understanding marginal cost is crucial for businesses in determining the most efficient production levels. In competitive markets, companies often use marginal cost pricing, where prices are set close to marginal costs to maximize profits while maintaining competitive prices.

Example

A manufacturer calculates that producing one additional unit of a product costs $5 in materials and labor, so the marginal cost of that unit is $5.