109 LearnersLast updated on June 11th, 2025
Marginal Cost
Marginal cost is the additional cost caused when producing one more unit of output. It is calculated by dividing the change in total production cost by the change in quantity. In this topic, let’s learn more about the marginal cost .
What is Marginal Cost?
The additional cost in the production of one extra unit is the marginal cost. It is the ratio of the change in the total production cost to the change in the number of units produced. It is used to understand the impact of the production of an additional unit on the total cost of production. Marginal cost is calculated as marginal cost = change in production cost/change in quantity.
For example, the cost of producing 100 cakes is $500, and for producing 101 cakes, it costs $505. Here, the marginal cost is $5.
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Applications of Marginal Cost
Let’s learn a few of the applications of marginal cost, like how we use it in economics and business.
- Pricing Decisions: Marginal cost determines prices by analyzing the variable cost.
- Profit planning: By understanding the relationship between the cost, volume, and profit we can plan the profit
- Evaluation of Performance: The performance of each sector is calculated by analyzing the volume profit.
How to Calculate Marginal Cost
The marginal cost can be calculated using the equation,
Marginal cost = change in production cost/change in quantity
To find, the change in production cost is the difference between the final cost and the initial cost. The change in quantity is the difference between the extra unit of production and the units of production.
For example, the car company is producing 1000 cars per month and the cost of production is $5000000. The cost of producing 1001 cars is $5005000. Calculate the marginal cost.
Marginal cost = change in production cost/change in quantity
Here, the cost to produce 1000 cars = $5000000
Cost to produce 1001 cars = $5005000
Change in production cost = $5005000 - $5000000 = $5000
Change in quantity = 1001 units — 1000 units = 1unit
Therefore, the marginal cost = change in production cost/change in quantity
= 5000 / 1 = $5000
So, the marginal cost of producing one additional car is $5000
Tips and Tricks to Understand the Marginal Cost
Tips and tricks are the easiest way to understand and master any concept. To master marginal cost use these tips and tricks.
- Memorizing the formula: By understanding the concept and memorizing the formula of marginal cost, students can easily calculate the marginal cost. The formula is Marginal cost = change in production cost/change in quantity
- Students should solve different numerical problems for better understanding.
- Apply the marginal cost formula in real-life examples for a better understanding.
Common Mistakes and How to Avoid Them in the Marginal Cost
When learning about marginal cost, students tend to make mistakes as they often get confused with the concepts. Most of these mistakes are common and easy to fix. So let’s learn a few common mistakes and master marginal cost.
Mistake 1
Confusing with variable and fixed cost
Confusing the concept of variable and fixed costs can lead to mistakes. To avoid this error, kids should understand the concept of fixed and variable costs.
Mistake 2
Not focusing on the contribution
Not considering the contribution margin while deciding the pricing. Students should calculate the contribution margin by finding the difference between sales and variable costs.
Mistake 3
Making errors in calculation
Students when working on marginal cost tend to make simple calculation errors. To avoid this mistake they should double-check the answer to verify whether it's correct or not.
Mistake 4
Not considering the negative marginal profit
Marginal profit can be both positive and negative, sometimes students think that it can only be positive. When the marginal profit is negative then the production should be stopped to avoid loss.
Mistake 5
Using wrong equations when finding the marginal cost
When the marginal cost students tend to use the wrong marginal cost formula. To avoid this error students should be aware of the formula, marginal cost = change in production cost/change in quantity
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Solved Examples of Marginal Cost
Problem 1
A company produces 1,000 widgets at a total cost of $5,500. When production increases to 1,200 widgets, the total cost rises to $5,900. What is the marginal cost of the 200 additional widgets?
The marginal cost is $2 per unit
Explanation
Marginal cost = change in production cost/change in quantity
Here, the cost to produce 1000 widgets = $5500
Cost to produce 1200 widgets = $5900
change in production cost = 5900 - 5500 = 400
change in quantity = 1200 - 1000 = 200
Marginal cost = 400 / 200 = $2
Problem 2
A company increases production from 5,000 to 5,500 units, and the total cost increases from $50,000 to $52,000. What is the marginal cost per unit?
The marginal cost is $4 per unit
Explanation
Marginal cost = change in production cost/change in quantity
Here, the cost to produce 5000 units = $50000
Cost to produce 5500 units = $52000
change in production cost = 52000 - 50000 = 2000
change in quantity = 5500 - 5000 = 500
Marginal cost = 2000 / 500 = $4
Problem 3
A factory produces 3,000 units at a total cost of $12,000. When production increases to 3,500 units, the total cost rises to $12,500. What is the marginal cost of producing the additional 500 units?
The marginal cost is $1 per unit
Explanation
Marginal cost = change in production cost/change in quantity
Here, the cost to produce 3000 units = $12000
Cost to produce 3500 units = $12500
change in production cost = 12500 - 12000 = 500
change in quantity = 3500 - 3000 = 500
Marginal cost = 500 / 500 = $1
Problem 4
A company produces 2,000 units at a cost of $8,000. The total cost increases to $8,500 when production rises to 2,500 units. What is the marginal cost per unit?
The marginal cost is $1 per unit
Explanation
Marginal cost = change in production cost/change in quantity
Here, the cost to produce 2000 units = $8000
Cost to produce 2500 units = $8500
Change in production cost = 8500 - 8000 = 500
Change in quantity = 2500 - 2000 = 500
Marginal cost = 500 / 500 = $1
Problem 5
A business's fixed costs are $2,000, and its variable cost per unit is $5. If the price per unit is $10, how many units must the business sell to cover its fixed costs?
The business will sell around 400 unit
Explanation
The cost per unit = price per unit - variable cost
Contribution per unit = $10 - $5 = $5
Break-even quantity = fixed cost/contribution per unit
= 2000 / 5 = 400 units
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FAQs on Marginal Cost
1.What is the marginal cost?
2. How do you calculate the marginal cost?
3.What is the real-life application of marginal cost?
4.Why is marginal cost important?
5.What is the variable cost?
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Dr. Sarita Ghanshyam Tiwari
About the Author
Dr. Sarita Tiwari is a passionate educator specializing in Commercial Math, Vedic Math, and Abacus, with a mission to make numbers magical for young learners. With 8+ years of teaching experience and a Ph.D. in Business Economics, she blends academic rigo
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