Marginal Cost of Production
The formula for marginal costs of production is:
Change in total production costs/Change in total quantity produced
Difference between fixed and variable costs.
In economics, variable cost and fixed cost are the two main costs a company has when producing goods and services. A company's total cost is composed of its total fixed costs and its total variable costs. Variable costs vary with the amount produced. Fixed costs remain the same, no matter how much output a company produces.
A variable cost is a company's cost that is associated with the amount of goods or services it produces. A company's variable cost increases and decreases with the production volume.
For example, suppose company ABC produces ceramic mugs for a cost of $2 a mug. If the company produces 500 units, its variable cost will be $1,000. However, if the company does not produce any units, it will not have any variable cost for producing the mugs.
Marginal costs of production will keep going down as production rises until the company has to incur more costs to produce more products. For instance, it may need to buy another machine, add warehouses or buy more materials. At that point, the next unit produced will have a higher marginal cost of production.
Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit. It is most often used among manufacturers as a means of identifying an optimum production level.
Marginal cost of production is best used to determine when a company can reach an economy of scale to optimize production and overall operations.
A fixed cost does not change with the amount of goods or services a company produces. It remains the same even if no goods or services are produced.
Using the same example above, suppose company ABC has a fixed cost of $10,000 per month for the machine it uses to produce mugs. If the company does not produce any mugs for the month, it would still have to pay $10,000 for the cost of renting the machine. On the other hand, if it produces 1 million mugs, its fixed cost remains the same. The variable costs change from zero to $2 million in this example.