Why is marginal cost an important concept to understand?

Businesses aiming to make profits need to have an indication of the marginal cost of supplying extra output. They can make higher profits providing the marginal cost is less than the marginal revenue.

If the marginal cost of increasing output is low, then a firm might benefit from expanding their production because it will lead to a fall in the average (or unit) cost of supply.

Can marginal cost be hard to measure?

Many firms engaged in mass production do not change their output in single units. They might produce “batches” of extra output e.g. by adding more shifts to their factory production.

It is probably easier to measure marginal cost for “tangible outputs” e.g. an extra barrel of oil or tonne of steel. Harder to accurately calculate the marginal cost of more people using a train service.