Short-run marginal cost is an economic concept that describes the cost of producing a small amount of additional units of a good or service. Marginal cost is a key concept for making businesses function well, since marginal costs determines how much production is optimal. If the revenue gained from producing more units of a good or service is less than the marginal cost, the unit should not be produced at all, since it will cause the company to lose money.
Calculate the change in total cost when producing a given quantity of additional units. Total cost is equal to fixed costs plus variable costs. The change in total cost will be the new total cost after producing any additional units, minus the total cost before producing the units.
Calculate the change in quantity. To do this simply subtract the original quantity from the new quantity. For many marginal cost calculations, the change in quantity will be equal to one.
Divide the change in total cost calculated in step 1 by the change in quantity calculated in step 2 to find the short-run marginal cost.
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- Long-run marginal costs differ from short-run in that no costs are fixed in the long run. In the short run, companies have costs such as rent and other payments that cannot be changed but, in the long run, such costs can be altered.
- The general formula for calculating short-run marginal cost is: MC= d(TC)/d(Q) where TC is total cost, Q is quantity, and d signifies the change in these values.