Cost Concepts > Marginal Cost

• Marginal cost is the extra cost of producing one more unit of output.
• It tells us by how much total cost increases when we make one more item.

\[MC_n=TC_n-TC_{n-1}\]

Where:

• MC_n: Marginal cost of nth unit
• TC_n: Total cost at n units
• TC_n−1: Total cost at (n-1) units

Or, more generally:

\[MC=\frac{\Delta TC}{\Delta Q}\]

• ΔTC: Change in total cost
• ΔQ: Change in quantity of output (usually 1 unit)

If the total cost of 3 units is ₹222 and the total cost of 4 units is ₹252:

• MC of 4th unit = ₹252 – ₹222 = ₹30

• MC and Fixed Cost: MC is not affected by fixed cost; it only changes with variable cost.
• Adding Up MC: Total variable cost (TVC) for n units is the sum of MCs up to n.
• MC Curve Shape: The MC curve is U-shaped because initially, as output increases, costs go down (increasing returns); after a point, costs go up as output increases further (decreasing returns).​
• Relation to Average Cost (AC):
  (i) When AC falls, MC < AC.
  (ii) When AC rises, MC > AC.
  (iii) MC cuts AC at AC’s minimum point.

Suppose a bakery spends ₹500 to make 10 loaves of bread and ₹540 to make 11. The MC of the 11th loaf is ₹40 (₹540 - ₹500). MC shows how much more it costs to make just that one more loaf.

• Marginal cost = extra cost for one extra unit.
• MC uses only variable costs (not fixed cost).
• MC curve is U-shaped in the short run.
• MC is key for decision making: output is optimal when Marginal Cost = Marginal Revenue.
• Sum of all MCs = Total Variable Cost (TVC).