Marginal cost is the cost that will be required to produce one additional unit of goods or products in relation to the estimated or actual volume of production. In other words, it is an increment of costs necessary to obtain the next unit of goods. To find the marginal cost, it is necessary to subtract the indicators of the two adjacent gross costs. Thus, in their form, marginal costs are very similar to the marginal utility of a product.
The marginal physical product is the increase in output in physical units, produced at the expense of an additional unit of variable costs, when other costs do not change. For example, maintaining the level of costs for raw materials and energy, but increasing labor costs, you can thereby increase production by one additional unit. However, economic calculations are in cash. Thus, the concept of marginal costs is preferable, since they are expressed in monetary units, in contrast to the physical product, measured in physical units (meters, pieces, and so on).
What are the benefits of marginal analysis in the economic study of costs or costs? In the decision-making process, it is primarily a matter of comparing cost comparisons. As a result, it can often be expedient, for example, to replace expensive resources or raw materials with cheaper analogues. Such a comparison is best done using marginal analysis.
Marginal costs should be distinguished from such a term as “irreversible costs”, which characterizes the missed opportunities associated with the previously adopted unreasoned decision. For example, you purchased shoes, but for some reason they did not suit you. You are forced to sell them at a price below the original cost. The difference between the purchase price and the sale price represents irreversible costs. The latter represent losses and are not taken into account in the decision-making process.
It is also necessary to distinguish between average and marginal costs. Average costs are determined by dividing total costs by the volume of production. Obviously, a company cannot sell goods at a cost lower than average costs, because then it simply goes bankrupt. Thus, the average cost is an important indicator of the enterprise.
Average and marginal production costs are interconnected. When the value of the former reaches its minimum, they should be equal to the latter.
For this reason, the adoption of any economic decisions should be accompanied by marginal, or marginal, analysis.
It is possible to evaluate the inefficiency and effectiveness of alternative solutions on the basis of limit comparisons, which imply an estimate of increments in the limit, that is, at the boundary of the change in specific quantities. The nature of economic decisions mainly determines what marginal costs will be, whether cost increments will be negative or positive.
As already noted, marginal cost in form is in many ways similar to marginal utility, which implies additional utility of the good. Therefore, all limit values can be evaluated as differential concepts, because in this case we are talking about the increment of additional quantities (costs, utility, and so on).
Thus, marginal costs enable the company to predict the competitive offer of its product. To do this, compare the marginal cost curve and the supply curve. Maximum profit will be reached at the point where the supply curve and the equilibrium market price line intersect.