Marginal cost is the cost of the next unit or one additional unit of volume or output.

To illustrate marginal cost let's assume that the total cost of producing 10,000 units is $50,000. If you produce a total of 10,001 units the total cost is $50,002. That would mean the marginal cost—the cost of producing the next unit—was $2.

The reason that the marginal cost was $2 instead of the previous average cost of $5 ($50,000 divided by 10,000 units) is that some costs did not increase when the additional unit was produced. For example, fixed costs such as salaries, depreciation, property taxes generally do not increase when one additional unit is produced.

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