Marginal Cost Definition
Simply, a change in total cost that appears from the change in product numbers by one is a good marginal cost definition. Even more accurately, the marginal cost is the change that arises from producing one more product. As a general rule of thumb for a good marginal cost definition, the marginal cost is usually related to the marginal revenue for a company, at least in a graphical/analytical sense. This notion is under the assumption that the overall results are dependent of the overall volume provided for each company.
Marginal Cost Analysis
Though the actual definition may seem daunting, the real solution that stems from these facts is easy to understand. As said above, the marginal cost is the change in cost that arises from producing one more unit of product. Furthermore, one needs to understand and realize the necessary steps to produce another unit of product.
For example, if a deck building company wants to know their marginal cost to create another deck, they would need to figure out how much lumber it will cost to create this deck, also the nails and caulk necessary to finish the deck. It is also possible that a second warehouse may be necessary to store all the excess lumber bought. At the same time, they may need to spend money on a show-room, because of this product and the increasing popularity of the company. Furthermore, the company needs to decide whether more hands need be hired to complete the job. All of these variables taken into consideration, any of these could add to the cost necessary to create another deck. When all of the obligatory costs are put together from this listed situation, the marginal cost is realized and accepted.
Marginal Cost versus Marginal Revenue
As stated above, the marginal cost is usually related to marginal revenue in an economical sense. C company’s goal is to reach a situation where the marginal cost is equal to the marginal revenue. It is in this circumstance where the greatest profit can be achieved. As long as average total cost is less than the intersection of marginal cost and marginal revenue, economical profit can be achieved by a company. Furthermore, if economical profit is being obtained, the company is very well off indeed.