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Q5. WHAT IS MARGINAL COST AND WHY IS IT IMPORTANT TO UNDERSTAND FOR BUSINESS OWNERS AND MANAGERS?

Answer 1

Q5.

(Ans) Marginal cost (MC) is an incremental cost when producing an additional unit of a good or a service.

MC =

Here ?C represents change in total cost and  ?Q represents change in quantity.

Marginal cost is an important concept because business firms and managers follow marginal cost to optimise profits and output. A firm or an industry that is looking to optimize its profits will produce to that point where MC equals marginal revenue (MR).

Furthermore, the rising portion of the marginal cost curve is the supply curve of a firm or a company. The purpose of analysing marginal cost is also important in determining at what point of production process a firm will achieve economies of scale to optimize production and overall operations. Untill marginal cost is lower than per unit price of a good or service there is an opportunity for the producer to gain profit.