Marginal cost is defined as the cost of production of an additional unit of a good or a service. The figure is calculated at a given level of output and indicates the amount of inputs required to increase outputs by a specific constant.
Explanation:
Total costs of production can be divided into two large categories, which are fixed costs and variable costs. Fixed costs remain constant, regardless of production quantity. For example, rent that has to be paid for industrial properties does not depend on the output of the factory. In contrast to that, variable costs change as the quantity of production goes up or down.
These numbers are usually associated with the costs of raw material and labor. When business plans to increase the level of production, it is essential to estimate the amount of additional spending required to produce more goods. Marginal cost is the cost of producing one more unit of output, and thus, this figure is reflective of the way the cost of production changes as it increases. Mathematically, marginal cost can be represented as a function of the level of production
The concept of marginal cost is used in financial management to analyze and optimize the scaling of production. The cost of a single unit of a good is expected to decrease with the increase in outputs, as the fixed part of the cost will remain the same. At the same time, the dynamics of variable costs can be quite complex, as these amounts depend on various factors and consist of a number of components. Calculating marginal cost allows finding an optimal level of production and minimize the overall cost.