Glossary term
Marginal Cost: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
Marginal cost is the increase in total cost when one more unit of output is produced. It equals the change in total cost divided by the change in output. In the short run, it comes entirely from variable cost, since fixed cost does not change. The marginal cost curve is typically U-shaped.
In more detail
Marginal cost falls at first because of better use of fixed inputs, then rises as diminishing returns set in. It crosses the average variable cost and average cost curves at their lowest points. A competitive firm produces up to the output where marginal cost equals price.
Example
If producing 4 units costs ₹270 in total and 5 units cost ₹330, the marginal cost of the fifth unit is ₹60. A competitive firm sets price equal to marginal cost to maximise profit.
Key points
- Marginal cost cuts average cost curves from below at their minimum.
- The sum of marginal costs gives total variable cost.
- A firm's supply curve is the rising part of marginal cost above minimum average variable cost.
Common mistake
Including fixed costs in marginal cost. Fixed costs do not change with output.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 3: Production and Costs.