Marginal Cost

Marginal cost refers to the change in total cost when one additional unit of a good or service is produced. In other words, marginal cost represents the change in total cost resulting from producing one more unit of output. Marginal cost can be calculated as follows:

$$MC=\frac{\mathrm{\Delta }TC}{\mathrm{\Delta }\mathrm{Q}}$$

Where:

• MC = Marginal cost
• ΔTC = Change in total cost
• ΔQ = Change in the quantity of output

Table 1.3: Units of Output, Total Cost, and Marginal Cost

Analysis of Marginal Cost from Table 1.3

In Table 1.3, the marginal cost is derived by calculating the change in total cost relative to the change in the quantity of output. For example, when production increases from 1 unit to 2 units, the marginal cost is:

$$MC=\frac{100-90}{2-1}=10$$

Similarly, the marginal cost is calculated for each subsequent production level. The marginal cost initially decreases as production increases, reaching a minimum value of Rs. 5 when the production level is 3 units. After that, the marginal cost increases as production continues.

Marginal Cost Curve

The Marginal Cost Curve shows the relationship between the quantity of output produced and the marginal cost. Based on the values from Table 1.3, the Marginal Cost Curve is derived and plotted in Graph 1.3.

Graph 1.3: Marginal Cost Curve

In Graph 1.3, the quantity of output is plotted on the X-axis, and the marginal cost is plotted on the Y-axis. The Marginal Cost Curve starts from the origin and initially decreases, reaching its minimum at a production level of 3 units (Rs. 5). After that, the curve rises as the production increases. The Marginal Cost Curve typically has a U-shape, indicating that marginal costs first decrease and then increase as production continues. This is a key characteristic of the law of diminishing returns.