Marginal cost is the additional cost incurred by producing one more unit of a good or service. It is a key concept in economics and is calculated by taking the change in total cost that arises when production is increased by one unit.
Mathematically, marginal cost (MC) can be expressed as:
\[ MC = \frac{\Delta TC}{\Delta Q} \]
where:
- \( \Delta TC \) is the change in total cost,
- \( \Delta Q \) is the change in quantity produced.
Understanding marginal cost is crucial for businesses as it helps in making decisions regarding pricing, production levels, and resource allocation. If the marginal cost of producing an additional unit is less than the price that unit can be sold for, it can be profitable to increase production. Conversely, if the marginal cost exceeds the sale price, it may be wise to reduce production.