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Marginal Cost

Marginal cost is the additional cost incurred from producing one extra unit of a good or service. It is calculated by the change in total cost divided by the change in output. Understanding marginal cost is essential for firms when making production decisions, as it helps determine the most efficient output level—typically where marginal cost equals marginal revenue.

In the UK, consider a bakery producing loaves of bread. If producing 100 loaves costs £200, and producing 101 loaves costs £202, the marginal cost of the 101st loaf is £2.

Marginal cost often changes with output levels. For example, UK electricity providers may face low marginal costs for extra units of power from wind turbines once the infrastructure is in place, since wind is free. However, in manufacturing, marginal costs may rise due to overtime wages or machine wear.

Understanding marginal cost helps firms set prices and manage resources efficiently.