marginal cost

Examples of marginal cost in the following topics:

• Average and Marginal Cost

  • Marginal cost includes all of the costs that vary with the level of production.
  • Marginal cost is not related to fixed costs.
  • When the average cost declines, the marginal cost is less than the average cost.
  • When the average cost increases, the marginal cost is greater than the average cost.
  • This graph is a cost curve that shows the average total cost, marginal cost, and marginal revenue.

• Marginal Cost Profit Maximization Strategy

  • In order to maximize profit, the firm should set marginal revenue (MR) equal to the marginal cost (MC).
  • Marginal cost is the change in total cost divided by the change in output.
  • An example of marginal cost is evident when the cost of making one pair of shoes is $30.
  • Firms will produce up until the point that marginal cost equals marginal revenue.
  • This graph shows a typical marginal cost (MC) curve with marginal revenue (MR) overlaid.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • This happens due to the fact that marginal cost of capital generally is the weighted average of the cost of raising the last dollar of capital.
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.

• Marginal Revenue and Marginal Cost Relationship for Monopoly Production

  • For monopolies, marginal cost curves are upward sloping and marginal revenues are downward sloping.
  • Marginal costs get higher as output increases.
  • Production occurs where marginal cost and marginal revenue intersect.
  • Production occurs where marginal cost and marginal revenue intersect.
  • Analyze how marginal and marginal costs affect a company's production decision

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • The various types of cost curves include total, average, marginal curves.
  • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
  • The marginal revenue-marginal cost perspective relies on the understanding that for each unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
  • If the marginal revenue is greater than the marginal cost, then the marginal profit is positive and a greater quantity of the good should be produced.

• Monopoly Production Decision

  • To maximize output, monopolies produce the quantity at which marginal supply is equal to marginal cost.
  • If we assume increasing marginal costs and exogenous input prices, the optimal decision for all firms is to equate the marginal cost and marginal revenue of production.
  • Because of this, rather than finding the point where the marginal cost curve intersects a horizontal marginal revenue curve (which is equivalent to good's price), we must find the point where the marginal cost curve intersect a downward-sloping marginal revenue curve.
  • Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue (MR) equals marginal cost (MC).
  • Calculate and graph the firm's marginal revenue, marginal cost, and demand curves

• Optimal Quantity of a Public Good

  • The government is providing an efficient quantity of a public good when its marginal benefit equals its marginal cost.
  • The supply curve for a public good is equal to its marginal cost curve.
  • The public good provider uses cost-benefit analysis to decide whether to provide a particular good by comparing marginal costs and marginal benefits.
  • Output activity should be increased as long as the marginal benefit exceeds the marginal cost.
  • An activity should not be pursued when the marginal benefit is less than the marginal cost.

• Individuals Make Decisions at the Margins

  • The cost or benefit of the single decision is called the marginal cost or the marginal benefit.
  • In theory, individuals will only choose an option if marginal benefit exceeds marginal cost.
  • The prices represent the marginal costs of each car; purchasing the car will add the cost of the car to your total costs.
  • The tools of marginal analysis can illustrate the marginal costs and the marginal benefits of reducing pollution.
  • At point $Q_c$, the marginal costs will exceed the marginal benefits.

• Marginal Analysis

  • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
  • In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output is known as marginal-cost pricing.
  • Businesses often set prices close to marginal cost during periods of poor sales.
  • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.

• Profit Margin

  • Profit margin is one of the most used profitability ratios.
  • Recall that gross profit is simply the revenue minus the cost of goods sold (COGS).
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • Companies need to have a positive profit margin in order to earn income, although having a negative profit margin may be advantageous in some instances (e.g. intentionally selling a new product below cost in order to gain market share).
  • A low profit margin indicates a low margin of safety.