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What is Marginal cost? Definition, formula and example
What is Marginal Cost?
Marginal cost is the additional cost of producing one more unit of a product or service. For self-employed individuals, this means calculating how much extra time, effort, or resources you need to spend to deliver an additional product or service.
How to calculate marginal cost example
Marginal Cost Formula ∑
• Marginal Cost = Change in Total Costs \ Change in Quantity Produced
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Let’s say you’re a freelance baker:
• To bake 10 cakes, your total cost (ingredients, energy, time) is $100.
• To bake 11 cakes, your total cost increases to $115.
• The change in total costs is 115 - 100 = 15 , and the change in quantity is 11 - 10 = 1 .
Using the formula:
Marginal Cost = 15 - 1 = 15
So, the marginal cost of baking one additional cake is $15.
Why Marginal Cost Matters
Understanding your marginal cost helps you:
1. Set better pricing. If the marginal cost of a product or service is higher than the price you charge, you’re losing money.
2. Know when to scale. If producing extra units is too expensive, it might not be worth the effort.
3. Optimize resources. By calculating marginal cost, you can identify cost-saving opportunities.
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Marginal Cost Summary
1. Definition: Marginal cost is the extra cost of producing one more unit of a product or service.
2. Formula: Marginal Cost = Change in Total Costs \ Change in Quantity Produced
3. Example: Baking an extra cake costs $15.
4. Spreadsheet: Track your production levels and costs.
5. Calculator: A quick tool to compute marginal cost for freelancers.