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.
We find strong evidence to support marginal cost pricing in advertise-with-price games.
Once experience with relatively straightforward applications of marginal cost pricing develops, more sophisticated efficient-rate structures could be considered.
Marginal cost pricing may also be harmful in contexts outside of
Given that natural monopolies will earn enormous profit if unchecked by the government, or they will not produce if they are forced to charge marginal cost pricing, what options are available to the government to provide services to its consumers?
For future use, let us call this regulation the marginal cost pricing regulation and the regulation in the text the average cost pricing regulation.
Nonetheless, restructuring with its marginal cost pricing and elimination of cross-subsidies may be costly for some consumer groups, and perhaps for most rural consumers.
California has been a bellweather state in inaugurating regulatory pricing techniques,(1) and the California Public Utilities Commission (CPUC) has moved marginal cost pricing from crude to refined.
But the Directive will allow charges to be modulated for other reasons: a higher rate of cost recovery than under marginal cost pricing (but not for freight), reduction of external costs and tackling problems of scarcity.
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.
The dilemma is that adjusting rates to obtain efficient marginal cost pricing often entails significantly higher water bills by the average customer.
First, their analysis presents evidence that the welfare gains associated with marginal cost pricing of solid waste collection services will arise as a natural outcome when waste collection services are competitively provided.