1. What is Marginal Cost?
This section introduces the fundamental definition of marginal cost. Marginal cost is a cornerstone of microeconomics that measures the change in total production cost from making or producing one additional unit. To understand it hands-on, use the simple calculator below.
Marginal Cost Calculator
Imagine a bakery. Enter the total cost for two different quantities of cookies to see the marginal cost of producing the additional cookies.
Formula: MC = (Δ Total Cost) / (Δ Quantity)
Calculated Marginal Cost:
$10.00
per additional unit
2. Deriving the Cost Curves
The Marginal Cost (MC) curve is derived from a firm's production costs. It has a crucial relationship with Average Total Cost (ATC) and Average Variable Cost (AVC). This interactive chart visualizes these curves based on sample production data. Toggle the curves to see how MC intersects both ATC and AVC at their lowest points.
Key Insight: The "swoosh" shape of the MC curve is due to the law of diminishing returns. Initially, adding more workers (variable input) leads to great efficiency (falling MC), but eventually, they get in each other's way, and efficiency drops (rising MC).
3. Application: The Profit-Maximizing Rule
Firms use the marginal cost curve to make critical decisions, most importantly, how much to produce. A rational firm will produce up to the point where the cost of producing one more unit (Marginal Cost) is equal to the revenue it gets from selling that unit (Marginal Revenue). For most competitive firms, marginal revenue is simply the market price. Use the slider to change the market price and see how it affects the optimal production quantity.
Optimal Production Quantity:
7 Units
Produce where Price (MR) equals Marginal Cost (MC).
4. What Causes the Curve to Shift?
The marginal cost curve is not static. It shifts when the costs of variable inputs change. Fixed costs (like rent) do not affect the marginal cost curve. Use the buttons below to simulate how different economic events would shift a company's marginal cost curve, altering their production decisions.