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Definition:

Marginal means ‘extra’. Marginal cost (MC) is an increase in the total cost that results from one unit increase in output. Marginal cost (MC) is defined as:

“The cost that results from one unit change in the production rate”.

Formula:

Marginal cost (MC) which is really an incremental cost that can be expressed by the following formula.

Example:

For example, the total cost of producing one pen is $5 and the total cost of producing two pens is $9, then the marginal cost of expanding output by one unit is $4 only (9 – 5 = 4).

The marginal cost (MC) of the second unit is the difference between the total cost of the second unit and total cost of the first unit (see the table given below).

Marginal cost (MC) is governed only by variable cost which changes with changes in output.

The readers can be easily understand from the table (schedule) given below as to how the marginal cost is computed:

Schedule:

Diagram:

Marginal cost (MC) curve, can be plotted graphically.

The marginal cost curve in fig. (13.8) decreases sharply with smaller Q output and reaches a minimum. As production is expanded to a higher level, it begins to rise at a rapid rate.

Long Run Marginal Cost (MC) Curve:

The long run marginal cost (MC) curve like the long run average cost curve is U-shaped. As production expands, the marginal cost falls sharply in the beginning, reaches a minimum and then rises sharply.

Relationship between Long Run Average Cost and Marginal Cost (MC):

The relationship between the long run average total cost and long run marginal cost can be understood better with the help of following diagram:

It is clear from the diagram (13.9), that the long run marginal cost curve and the long run average total cost curve show the same behavior as the short run marginal cost curve express with the short run average total cost curve. So long as the average cost curve is falling with the increase in output, the marginal cost curve lies below the average cost curve.

When average total cost curve begins to rise, marginal cost curve also rises, passes through the minimum point of the average cost and then rises. The only difference between the short run and long run marginal cost and average cost is that in the short run, the fall and rise of curves LRMC is sharp. Whereas, in the long run, the cost curves falls and rises steadily.