The Central Role of Marglnal Cost Pricing

This chapter has stressed the importance of competition and marginal cost in attaining an efficient allocation of resources. But the importance of marginal cost extends far beyond perfect competition. Using marginal cost to achieve production efficiency holds for any society or organization trying to make the most effective use of its resources-whether that entity is a capitalist or socialist economy, a profit-maximizing or nonprofit organization, a university or a . church, or even a family. .

The essential 1’01( of marginal cost ill a market economy is this: Only prices are equal 10 111011 original costs is the ecology squeezing tilt’ maximum output and satisfaction from its scarce resources of land, labor. and capital.

Only when each firm has its own marginal cost equal to each other firm’s Me– will be the case when each Me. has been set equal to a common price-will the industry be producing its total output at minimum total cost. Only when price is equal to marginal cost for all firms will society be on its production-possibility frontier.

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