marginal costs of production

Marginal costs are defined as the change in total costs resulting from a one unit change in output. They are the variable costs associated with increasing output in the short run. A change in marginal costs might come about for example because of a change in the prices of essential raw materials or an increase in the wage rate paid to part-time employees.

Changes in marginal costs of production are shown in the diagram below.

The initial marginal cost curve is assumed to be MC1. If there is a fall in the prices of raw materials (for example resulting from an increase in the exchange rate or a fall in the market price of international commodities) then we would see an outward shift in the marginal cost curve from MC1 to MC2. A business would now be able to produce more output at any given price. An outward shift in MC is equivalent to an outward shift in the firm's supply curve

If variable costs increase, then we see an inward shift in MC from MC1 to MC3. Firms can now supply less output at each price level.

The marginal cost of producing an extra unit is linked with the marginal productivity of labour. If marginal product is falling, assuming the cost of employing extra units of labour is constant, then the extra costs of the additional units of output will rise.