180. Marginal Cost

Marginal cost and revenue

Marginal cost is the additional cost that a firm incurs to produce one more item. Marginal revenue is the additional revenue earned in selling one more item.

Marginal Cost: the cost added by producing one extra item of a product. Marginal Revenue: the additional revenue that will be generated by increasing product sales by one unit. It can also be described as the unit revenue the last item sold has generated for the firm.

Remember cost is made up of a fixed component (that does not change in relation to output) and a variable component (that which varies directly in relation to output).

Fixed costs are expenses such as Rent and Salaries (one has to pay these irrespective of how many units are produced) Variable costs are normally the raw materials that are used in the manufacture of the product ( and one can see that, for example, if you make wooden tables, there will be a direct relationship between the amount of wood used and the number of tables made.