marginalcost

Marginal cost is the increase in total cost when output rises by one unit. It can be defined as MC = ΔTC/ΔQ, or in calculus as dTC/dQ for continuous output. Since fixed costs do not change with output in the short run, marginal cost is determined primarily by changes in variable cost.

In many firms, marginal cost initially falls due to increasing efficiency, then rises due to diminishing marginal returns, producing a U-shaped MC curve. The MC curve intersects average total cost (ATC) and average variable cost (AVC) at their minimum points.

A firm’s short-run supply curve is the portion of the MC curve that lies above AVC. Profit-maximizing output in a competitive market occurs where MC equals marginal revenue (MR); with perfect competition MR equals the market price. If price exceeds MC, production should be expanded; if price is below MC, output should be reduced.

In the long run, all costs are variable, and the long-run marginal cost (LRMC) reflects the slope of the long-run total cost function. The LRMC may differ from the short-run MC because of choices about plant size and technology. The long-run average cost (LRAC) curve is the envelope of short-run average cost curves, and LRMC typically intersects LRAC at its minimum.