Question

Define or explain the following concept.

Marginal Cost

Answer 1

Marginal cost is the additional cost incurred in the production of one more unit of a good or service. It is derived from the variable cost of production, given that fixed costs do not change as output changes, hence no additional fixed cost is incurred in producing another unit of a good or service once production has already started.

Marginal cost is significant in economic theory because a profit maximising firm will produce up to the point where marginal cost (MC) equals marginal revenue (MR).