What is Marginal Cost?
Marginal cost is the additional cost incurred when a firm produces one more unit of output. It's critical for pricing decisions and profit maximisation—firms should produce until marginal cost equals the price.
Marginal cost (MC) is the extra cost of producing one additional unit: MC = ΔTC ÷ ΔQ. For example, if producing 10 units costs £100 and 11 units costs £106, the MC of the 11th unit is £6.
Step-by-step worked examples
At 50 units, total cost is £500. At 51 units, total cost is £508. What is the marginal cost?
Total cost at 50 units = £500 Total cost at 51 units = £508 MC = £508 − £500 = £8 per unit
A café produces 100 coffees for £200 and 101 coffees for £202.50. Find MC.
Cost of 100 coffees = £200 Cost of 101 coffees = £202.50 MC = £202.50 − £200 = £2.50 per coffee
A printer makes 30 booklets at total cost £300, and 32 booklets at £315. What is MC per additional booklet?
Cost at 30 booklets = £300 Cost at 32 booklets = £315 Change in output = 32 − 30 = 2 booklets MC = (£315 − £300) ÷ 2 = £15 ÷ 2 = £7.50 per booklet
Flashcards
Quick quiz
Q1.Total cost rises from £400 to £415 when output goes from 20 to 21 units. What is MC?
Q2.The MC curve is U-shaped because…
Q3.A firm maximises profit when…
Q4.If MC falls as output rises, what happens to AC?
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Common mistakes
Confusing MC with average cost per unit. — Correct: MC is the cost of ONE more unit, not the average across all units.
MC always increases. — Correct: MC typically falls at first (economies), then rises (diseconomies).
Firms stop when AC is lowest. — Correct: Firms maximise profit where MC = Price (or MR), not where AC is lowest.
Higher output always means lower MC. — Correct: MC eventually rises due to capacity limits and resource constraints.
FAQ
What is marginal cost?
The additional cost of producing one more unit of output: MC = ΔTC ÷ ΔQ.
How is marginal cost calculated?
MC = Change in total cost ÷ Change in quantity = (TC₂ − TC₁) ÷ (Q₂ − Q₁).
Why is the MC curve U-shaped?
Economies of scale at low output (MC falls), then diseconomies at high output (MC rises).
How does MC guide pricing decisions?
Firms produce until MC equals the price (perfect competition) or marginal revenue (imperfect competition) to maximise profit.