Final answer:
The marginal cost represents the additional cost of producing one more unit of output, typically rising due to the principle of diminishing marginal returns. It is calculated by dividing the change in total or variable cost by the change in output. Firms use this calculation to compare against additional revenue to determine profitability of producing additional units.
Step-by-step explanation:
The marginal cost is the additional cost incurred from the production of one more unit of a good or service. It is calculated by taking the change in total cost, which can be equivalent to the change in variable cost, and dividing it by the change in output. As a company produces more, the marginal costs are typically rising due to the principle of diminishing marginal returns. This concept states that after a certain point, producing each additional unit will cost more than the previous unit.
To determine whether producing an additional unit is beneficial, a firm compares the marginal cost to the additional revenue gained from selling that unit. If the additional revenue is greater than the marginal cost, the marginal unit is adding to the firm's profit.
An example provided is the increase in production from 40 to 60 haircuts, where the total cost rises by $80. In this case, the marginal cost is $4 per additional haircut (80/20).
The marginal cost is an important figure in economic analysis and business decision-making, as it helps firms optimize their production levels to maximize profits. Understanding and utilizing this concept is crucial for businesses in various markets.