Marginal cost
Marginal cost is the cost of producing one more unit. Firms maximise profit by producing until marginal cost equals marginal revenue.
In perfect competition, price ends up equal to marginal cost. Digital goods have marginal costs near zero, which is why software and streaming behave differently from physical products.
Formula
Marginal cost = change in total cost ÷ change in quantity
Related terms
- Marginal utility: Marginal utility is the extra satisfaction from one more unit of something.
- Diminishing returns: Diminishing returns means that adding more of one input, while others stay fixed, eventually adds less and less output.
- Perfect competition: Perfect competition is a market with many sellers of an identical product, free entry and exit, and full information, so no one firm can set the price.
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