Marginal Cost-Meaning

Cost and production are the two most fundamental concepts of economics on which the entire market relies. They play a significant role in determining several things in the production process. There are several mathematical terms such as production cost, production functions, and so on that come with them, thus helping to understand multiple industries in a better way. 

 In this article on the understanding of the marginal cost meaning, you will get detailed information on the concept of the production function, types of cost, marginal cost meaning, and other related topics of economics such as cost behaviour in the short term and long term. So, without further ado, let us get started with the marginal cost definition in the financial accounting study material.

Concept of the Production Function 

Production function plays a significant role in the easy explanation of cost and production. This is referred to as a functional relationship between the output produced through the production function and several production factors. In mathematical terms, the production function can be written as Q= f(L, K), where the Q is the output “L” and “k” are inputs that are included in the process of producing a good. Apart from these, there are several other factors affecting the production function; however, they are not part of your syllabus as currently, we are engaged with only a two-factor model. 

Types of Costs 

There are several different types of costs. These are variable costs, fixed costs, marginal cost, semi-variable costs, economic cost, sunk cost, opportunity cost, accounting costs, and other different types of costs. The fixed cost can be defined as the cost that does not change, no matter the output. The variable cost keeps on varying depending on what has been produced. 

Introduction of Marginal Cost 

Marginal cost is defined as the additional cost incurred to produce an additional unit of a product. Let’s understand marginal cost via an example. Say to produce 10 cups of coffee, the cost included is $10; however, the cost for producing only one cup of coffee is $0.90. Here, the marginal cost would be $0.90 as it is needed to produce an additional coffee cup. 

The marginal cost includes both fixed cost and variable cost. When talking about the fixed cost, marginal cost is calculated even if the production expands. In contrast, the variable cost is always a part of marginal cost. Hence, it can be said that the marginal cost is made up of both fixed cost and variable cost. 

Importance of Marginal Cost 

In economics, the marginal cost is an important concept as it helps in the maximisation of profit. When the marginal cost is equal to the marginal revenue, it is referred to as profit maximisation. It can be calculated by dividing the change in the total cost by the change in the total quantity. Let’s understand this with an example – 

Mukesh, the business owner of A, is producing 100 units at the cost of $100. Later, the business decides to produce an extra 100 units at the cost of $90 only. Here, the marginal cost would be deceived as to the change in the total cost, which is $90 in this case, by putting these in the formula of marginal cost, where $90/$100, the result comes out to be $0.90. 

Cost Behaviour in Short Run 

When it comes to the short run, inputs are generally fixed, which means they cannot be changed. The short-run cost function can be described as the relationship between the cost of production and output. It mainly deals with the changes in the production cost with the change in output level, in case everything else remains the same. 

Conclusion 

With this, we end our study material on the marginal cost meaning in economics, which can be expressed as a type of cost that can be defined as the additional cost included to produce an additional unit of a product. There are several mathematical terms such as production cost, production functions, and so on that come with them, thus helping to understand multiple industries in a better way. In these study material notes on the marginal cost meaning, we studied financial economics in length. 

We covered the marginal cost meaning, the importance of financial accounting, balance sheets, and other related topics in detail. We hope the advantages of accounting study material has helped you attain a greater understanding of this topic.