Define “marginal cost”. discuss the importance of classifying expenses into variable and fixed. give two examples each
Answers
Definition of Marginal Cost:
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Marginal cost in economics is defined as the change in the total cost i.e an increase or decrease in the total cost of producing an additional unit of the product. It can also be defined as the difference in the total cost of producing the second unit and total cost of producing the first unit.
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Example 1: The total cost to produce 1000 units of a product is Rs. 5,000/-. The total cost to produce 1,001 units is Rs. 5,002/-. The marginal cost, which is the difference in costs to produce the second unit is Rs. 2/-. The marginal cost is usually less than the average cost (Rs.5/- here) of producing the first unit because fixed costs do not increase when an additional unit is produced.
Example 2: The total cost to produce 1 book is Rs.25/- and the total cost to produce 2 books is Rs. 45/-. The marginal cost for expanding the output by 1 unit is Rs. 20/-.