Marginal Cost

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Definition of Marginal Cost:

Marginal cost is the added cost to produce an additional unit of a good or service.

Detailed Explanation:

The marginal cost to provide lodging to an additional last-minute traveler would be minimal if a hotel had unoccupied rooms. The marginal cost would include items directly attributable to the customer. They would include the added electrical bill from turning on lights or turning up the thermostat on a cold evening, the free continental breakfast, if one is provided, or perhaps the franchise fee for the added revenue. It would not include the costs such as hiring a new employee, the building lease, or basic utilities. However, the marginal cost for an additional traveler, if the hotel is at capacity, would be very high. Theoretically, this would mean adding to the hotel. Maybe a room used for another purpose - such as a meeting room - could be modified. In each case, the marginal cost is the cost of providing the next unit - in this case a room. 

Supply Curve and Marginal Cost Curve 

A company's supply curve is also its marginal cost curve. The cost to produce a good or service is the most important component of determining a company’s supply curve. In fact, its marginal cost curve equals its supply curve. Assume you are a baker. It costs you $5.00 to bake your 20th cake. Because of added labor and oven capacity, it costs you $6.00 to bake your 21st cake. Your marginal cost for the 21st cake is $6.00. Also, assume that the 22nd cake will cost more than $6.00 to produce. How many cakes would you be willing to produce if your price is $5.00 How about at $6.00? (Remember that $6.00 would improve your economic profit.)? When your marginal cost is $5.00 would be willing to produce 20 cakes. When your marginal cost increases to $6.00 you would be willing to produce 21 cakes, at a price of six dollars. (20,$5) and (21,$6) are two points on your supply curve. This illustrates how your marginal cost curve is also your supply curve.  

Dig Deeper With These Free Lessons:

Marginal Analysis – How Decisions Are Made
Supply – The Producer's Perspective
Fiscal Policy – Managing an Economy by Taxing and Spending
Market Structures Part I – Perfect Competition and Monopoly
Output and Profit Maximization