DEFINITION OF MARGINAL COST
Marginal cost is’one of the most important concepts in all of economics. Marginal cost (MC) denotes the extra or additional cost of producing I extra unit of ,output. Say a firm is producing 1000 compact discs for a total cost of $]0,000. If the total cost of producing 1001 discs is S10,006, then the marginal cost of production is S6 for the 1001st disc.
Sometimes, the marginal cost of producing an extra unit of output can be quite low. For an airline flying planes with empty seats, the added cost of another passenger is literally peanuts; no additional capital (planes) or labor (pilots and flight attendants) is necessary. In other cases, the marginal cost of other unit of output can be quite high. Conan electric utility. Under normal circumstances, can generate enough power using only- its lowest most efficient plants. But on a hot summer day, en everyone’s air conditioners are running and demand for electricity is high! the utility may be reed to turn on its old, high-cost, inefficient generators.
This added electric power comes at a high marginal cost to the utility. Table 7-2 uses the data frorh Table 7-1 to iIIustrate how we calculate marginal costs. The blue-colored MC numbers in column (3) of Table 7-2 come from subtracting the TC in column (2) Rom the TC of the subsequent quantity. Thus the MC of the first unit is $30(= $85 – $55). The marginal cost of the second unit is $25(= SllO – $85), and so on. Instead of getting MC from the’ TC column, we could get the MC. figures by subtracting each VC number in column (3) of Table 7-1 from the VC in the row below it. Why? Because variable cost always grows exactly like total cost, the only difference
Once we know total cost.,it is easy to calculate marginal cost. To calculate the Me of the fifth unit, we subtract the total cost of the four units from the total cost of the five units, i.e., Me = $210 – $160 = $50. Fill in the blank for the marginal cost of the fourth unit.
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