Help Center

Home

Financial Terms and Glossary

Marginal cost

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.

Key points

• The additional cost incurred by producing one more unit of a good or service.

• Helps businesses determine the most efficient production levels.

• Often used in competitive markets for pricing strategies.

Quick Answers to Curious Questions

What does marginal cost represent?

It represents the additional cost of producing one more unit of a good or service.

Why is marginal cost important for businesses?

It helps businesses decide how much to produce and whether increasing production will lead to higher profits or losses.

How is marginal cost used in pricing strategies?

In competitive markets, companies may set prices close to marginal costs to remain competitive and maximize profits.

scroll top