What is marginal cost?

Marginal cost refers to the increase in total cost that arises from producing one additional unit of a good or service. It is a critical concept in economics and business decision-making because it helps firms determine the optimal level of production.

When a company understands its marginal cost, it can make informed decisions about whether to increase or decrease production based on how that additional output relates to revenue. If the marginal cost of producing an additional unit is less than the price at which it can be sold, then it would be beneficial to increase production.

In contrast, total cost encompasses fixed and variable costs associated with all units produced, average cost reflects the total cost divided by the number of units produced, and fixed cost per unit simply indicates how fixed costs are allocated over the total units produced. None of these concepts accurately capture the specific nuance of cost associated with just one more unit, which is the essence of marginal cost.