Marginal cost of production
What is marginal cost of production
is the change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level.
The reason is that increasing marginal cost reflects the law of diminishing marginal returns. As marginal returns decline, marginal cost increases. However, as marginal cost increases, the price a firm needs to receive also increases. The result is a positive relation between price and quantity supplied, which is the law of supply and the supply curve.
The enormous importance of marginal cost to a firm's short-run production decision cannot be overstated. A profit-maximizing firm compares the marginal revenue received from output sold with the marginal cost of producing it. If marginal revenue equals marginal cost, then the firm produces the profit-maximizing output quantity.
Marginal cost tends to be relatively high but declining for small quantities of production. It then reaches a minimum and rises for larger quantities of output.
marginal cost = change in total cost change in quantity of output