How to Use Marginal Cost

Enter the change in total cost.

Enter the change in Quantity.

Marginal Cost

How to calculate marginal cost

Marginal Cost Formula: change in costs/change in quantity

Example 1:
  • A company is producing 100 units at the cost of $500,
  • The average cost per unit is $5
  • We add an extra unit and the costs are now $550
  • Using the formula: 50 is the change in cost and the change in quantity is 1.
  • 50/1 = $50. The marginal cost for the 101st unit is $50
Example 2:
  • A company is producing paint brushes, the total cost of producing 4 paint brushes is $4
  • Average cost per paint brush is $1
  • The total cost of producing 5 paint brushes is $6
  • By adding another unit the cost increased by $2
  • Age using the formula, $2 is the change in costs and 1 being the change in quantity
  • $2/1 The marginal cost for the 5th paint brush is $2

Marginal Cost Definition: Marginal cost calculates the change in total cost of production/services due to a change in output.

Marginal costs calculation is an important factor in economic theory for many manufacturers to use as a means of isolating an optimum production level; in other words, to achieve economies of scale as soon as possible. You can recognize this effect in large production factories that can afford to produce a product at a lower cost than its competitors.

The cost and benefits are weighed in economies of scale when the marginal cost and the marginal benefits/revenue intersect; meaning when the production of one additional unit in their production line still manages to bring the overall production cost down.

Factors such as specialization in labor force and integrated technology assist in production schedules. As well, bulk orders representing lower per-unit costs and the division of internal function costs (i.e accounting, marketing, human resources etc) over the total units produced and sold also lower the marginal costs of an organization.

Marginal costs are guided by the principles applied in short-run production, which refers to an organization’s ability to produce or fulfill current contracts given one factor in production is fixed. Typically, the marginal cost curve will be low in the short range, increasing overtime. Determining the most economical efficient point of production and services is where the marginal cost and marginal benefits intersect and the key to optimizing manufacturing costs.

Economic factors also impact marginal costs in cases of transaction costs, price discrimination, and positive/negative externalities. Nowadays, with global trade, lower set up costs, outsourcing of internal functions, micro-manufacturing, hyper-local manufacturing and additive manufacturing (3D printing), all contributes to lower costs regardless of the size of the company.

Marginal cost does not take into account the fixed cost per unit of output. Fixed cost such as salaries for permanent employees, rent on a non-cancellable lease, or depreciation in building value etc are costs that are not dependent on the production level, and can be determined divided over the total output. You can find our Average fixed cost calculator here.

Another cost function to consider in production decisions is the Average Variable Cost. To determine a variable cost is any costs that changes with the level of output (labour force, materials, electricity etc) and the average can be found by dividing the total average variable cost over the total output. If you would like to calculate the average variable costs for production, try our Average Variable Cost Calculator.

Change in costs can occur when the production costs either increases or decreases. A business may need an increase in output or a decrease depending on the number of orders received. An example is when a company needs to manufacture more units to meet demand. This requires hiring more workers, potentially moving to a larger warehouse and also increases the amount of raw materials needed. This results in a change in production costs that is increased. To obtain the change in costs, deduct the cost of production before the increase or decrease in production.

Change in Quantity is affected by a change in demand price. Lower prices will see an increase in quantities demanded and vice versa. As a source of instability, the change in quantity is tied with the change in demands, which affects markets in the following steps: a change is issued with demand/supply, this change causes either determinant to increase or decrease, resulting in a shortage or surplus of products, which influences the changes in prices, affecting the change in demand/quantity, ultimately eliminating the shortage/surplus and re-establishing market equilibrium.

To calculate the changes in quantity, the number of goods produced in the first production run is deducted from the number of goods produced in the following production run.