What is Marginal Cost?

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Marginal cost refers to the costs for producing another unit of a particular product or good. For instance, when a company produced 1001 products instead of 1000, the expense of producing the last item (1001st product) is considered as the marginal cost. The costs may differ and is one of the things that are considered when making a decision about which product to produce and the quantity of production.

A lot of companies target to maintain the balance between the costs and benefits. However, in some cases, conditions wherein the costs are high while the benefits are low are still regarded as acceptable. Furthermore, in some situations, the marginal cost can be permitted to increase in order to experience greater benefits. An example of this is pollution control, which initially involves lower costs for basic measures. However, as time passes, measures should be improved and more people are required to work to regulate the pollution. Thus, the costs of pollution control will increase, but is still considered as reasonable because it will keep the environment and the people healthy.

Many people think that the costs of production of one more item are fixed, but in reality, the marginal cost follows a curve. Generally, when only a limited number of goods are manufactured, the marginal cost is high. On the other hand, large quantity productions lead to a drop in the amount of expenses. The expenses will decrease considerably because the company will be able to negotiate with the supplier of raw materials for lower prices.

A part of the marginal cost is the raw cost of production, which comprises of the required materials, the factory where the product is manufactured, labor needed to produce the good, etc. Other aspects that can also add up to the marginal cost are the administration costs, limitations when it comes to the resources and technology, as well as environmental factors.