Marginal cost equation31/07/2020
Marginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit and it is calculated by dividing the change in the costs by the change in quantity.
Marginal cost is the change in the total cost of production upon a change in output that is the change in the quantity of production. In short, it is the change in total cost that arises when the quantity produced changes by one unit. Mathematically, it is expressed as a derivative of the total cost with respect to quantity.
Marginal Cost = (Change in Costs) / (Change in Quantity)
- Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of normal unit
- Change in Quantity = Total quantity product including additional unit – Total quantity product of normal unit
Calculation of Marginal Cost
Step 1: Consider the total output, fixed cost, variable cost, and total cost as input.
Step 2: Prepare a production graph considering a different quantity of output.
Step 3: Find the change in cost i.e. difference of the total cost of production including additional unit and total cost of production of the normal unit.
Step 4: Find the change in quantity i.e. total quantity product including additional unit and total quantity product of normal unit.
Step 5: Now, as per the formula of Marginal cost divide change in cost by a change in quantity and we will get marginal cost.
This produces a dollar amount for each additional unit of a product that is produced.
The change in costs will greatly depend on the scale of production that is already in place. For instance:
- A baker working out of their home kitchen may be able to produce anywhere from one to fifty baguettes without a significant change in costs since they can continue using the same oven in the same room. (Their largest cost increase in going from a single loaf to a 50-loaf production run would be the extra flour, salt, water, and yeast all quite low as far as raw materials go.)
- However, if the baker wants to scale up to producing hundreds of baguettes, they will probably need to start working in a much larger space than their home kitchen. In this case, increasing the quantity of output will result in a much greater fixed cost, since they will probably have to lease space in a larger facility, and perhaps purchase new equipment.
- Increased production costs do not necessarily indicate diminished total revenue. To the contrary, most businesses lower their per-unit cost of production by increasing their level of output. This ties to the principle of “economies of scale.” As the level of production increases, the average cost per unit produced tends to go down provided, of course, that there is a sufficient market for consumers willing to purchase your product.