Marginal cost helps businesses make informed pricing decisions. By knowing the additional cost incurred to produce one more unit, a company can set prices that cover both variable costs and contribute towards fixed costs and desired profit margins.
Page written by AI. Reviewed internally on June 25, 2024.
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To calculate the marginal cost, you’ll need information about the change in total cost and the change in quantity produced. Here’s how you can calculate the marginal cost:
Determine the initial total cost: Identify the total cost of production for a specific quantity.
Determine the final total cost: Identify the total cost of production for a different quantity, which is greater than the initial quantity.
Calculate the change in total cost: Subtract the initial total cost from the final total cost. This represents the change in cost.
Change in Total Cost = Final Total Cost – Initial Total Cost
Calculate the change in quantity: Determine the difference between the final quantity produced and the initial quantity.
Change in Quantity = Final Quantity – Initial Quantity
Calculate the marginal cost: Divide the change in total cost by the change in quantity.
Marginal Cost = Change in Total Cost / Change in Quantity
By performing these calculations, you’ll obtain the marginal cost, which represents the additional cost incurred to produce one additional unit of output.
Please note that the concept of marginal cost is applicable in the short run, where some costs may vary with the level of production while others remain fixed.
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