marginal cost

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Marginal cost

The increase or decrease in a firm's total cost of production as a result of changing production by one unit.

Marginal Cost

The total cost to a company to produce one more unit of a product. The marginal cost varies according to how many more or fewer units a company wishes to produce. Increasing production may increase or decrease the marginal cost, because the marginal cost includes all costs such as labor, materials, and the cost of infrastructure. For example, if a widget manufacturer increases the number of widgets it produces, it may need to buy more material, but the costs of labor and factory maintenance remain the same, and are spread out over a greater number of widgets. This may reduce the marginal cost. On the other hand, if the manufacturer hires more workers and builds another factory, it will likely increase the marginal cost. It is also known as the incremental cost.

marginal cost

The additional cost needed to produce or purchase one more unit of a good or service. For example, if a firm can produce 150 units of a product at a total cost of $5,000 and 151 units for $5,100, the marginal cost of the 151st unit is $100. Industries with sharply declining marginal costs tend to be made up of firms that engage in price wars to gain market share. For example, the airlines often discount fares to fill empty seats with customers from competing airlines. Also called incremental cost.

marginal cost

the extra cost that is incurred by a firm in increasing OUTPUT by one unit. Given that FIXED COSTS do not vary with output, marginal costs are entirely marginal VARIABLE COSTS. Marginal cost generally includes the DIRECT MATERIALS and DIRECT LABOUR COST of a product along with VARIABLE OVERHEADS. See MARGINAL REVENUE.
Marginal costclick for a larger image
Fig. 114 Marginal cost.

marginal cost

the extra cost (addition to TOTAL COST) that is incurred in the SHORT RUN in increasing OUTPUT by one unit. Given that FIXED COSTS do not vary with output, marginal costs (MC) are entirely marginal VARIABLE COSTS. MC falls at first, reflecting increasing RETURNS TO THE VARIABLE-FACTOR INPUT so that costs increase more slowly than output, as shown in Fig. 114. However, MC then rises as decreasing returns set in so that costs increase faster than output.

MC together with MARGINAL REVENUE determine the level of output at which the firm attains PROFIT MAXIMIZATION.

References in periodicals archive ?
Long-run problems of marginal cost pricing not covering average costs can occur in declining cost (natural monopoly) industries.
price-fixing rule that becomes a de facto marginal cost pricing
Although marginal cost pricing appears to offer benefits to all stakeholders, there are a number of practical problems associated with the use of marginal cost pricing for the PTCL.
In California, will the CPUC continue marginal cost pricing for utility services that will remain regulated after the rate freeze expires (local transmission, distribution and its several subfunctions, and QF payments)?
The trouble is that marginal cost pricing will obviously not cover all costs if, as in major parts of the regulated industries, there are economies of scale or scope.
Now suppose there is a constant mark-up, over marginal cost pricing structure.
By contrast, we estimate that a negative abatement cost of $37 per tonne could be achieved with greater integration, i.e., if electricity trade were complemented by the implementation of marginal cost pricing in the hydro jurisdiction.
In such circumstances, there is a strong financial management case for fixing, say, transport fares, at levels touching the minimum point of marginal cost schedule and any deficit caused to the exchequer by the minimum marginal cost pricing may be more than compensated by productive subsidies and to ensure that such subsidies are not misused/misallocated (i.e., through massive subsidization of high-cost transport fares for the benefit of low-income earners based on welfare considerations) from Central (Federal) and state governments, M.
However, Lucas Davis and Eric Muehlegger document significant departures from marginal cost pricing in domestic natural gas markets.
Obviously, the basis for this classification of Hotelling derives from his espousal of marginal cost pricing. At the beginning of his famous 1938 paper, Hotelling indicates that, "We shall bring down to date in revised form an argument due essentially to the engineer Jules Dupuit, to the effect that the optimum of the general welfare corresponds to the sale of everything at marginal cost" (Hotelling 1938, p.
Finally, a number of commentators have entertained the possibility of using government subsidies to solve the marginal cost pricing problem.
Therefore, the social costs of monopoly in the rent-seeking contest are [C.sup.S] = H + [Delta] + (n - 1)T/n, where [Delta] represents a difference in welfare between the average cost pricing regulation and the marginal cost pricing regulation.(10) Next, we compute the social costs of monopoly in the RCS contest.