Marginal cost

The marginal cost is the additional cost induced by the last produced unit.

Within the framework of the theory marginalist, when the marginal cost increases, the Opportunity cost decreases.

Examples

Let us suppose that a cook of Sunday (and economist) invite his friends with his table and proposes to make them a tomato salad. It evaluates the work which it will have to make and it quantifies this work in euro. For the need for the exercise one will consider that one minute last corresponds to an expenditure of one euro:

To buy tomatos (unit costs of 1 €).
To thus prepare salad 15 minutes 15 €.

If each one of these friends is satisfied with only one tomato, to prepare its dinner for 5 friends (he not eating) will cost him: 5 € + 15 € = 20 €. The Average costs for each guest of 20 € is divided by 5 = 4 €

If it invites a sixth of it, the total costs will be of 21 €. Indeed the make-ready time will remain constant. In this case, the marginal cost of the sixth guest is of 21 € - 20 € = 1 € whereas the average costs for the whole of the guests are of 21 €/6 = 3,75 €.

It is noticed that the average costs drop as much as the marginal cost is lower than the average costs. This example makes it possible to illustrate the Rendements of scale and shows that one often may find it beneficial to increase his production to reduce his average costs of production.

It is not however about a general rule. Indeed, if the salad bowl of our economist can contain only 6 tomatos, the 7th guest will oblige it to prepare a second salad bowl. In this case, the cost of the meal will pass to: 7 € + 15 € + 15 € = 37 € and the marginal cost will be of 37 € - 21 € = 16 €

Mathematical definition

Mathematically, the marginal cost is defined by the Dérivée total costs, $\ C_T (Q)$ , compared to the produced quantity $Q$ : $C_m = \ frac {D C_T} {D Q}$ .

See too

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