While neoclassical models broadly assume that marginal cost will increase as production increases, several empirical studies conducted throughout the 20th century have concluded that the marginal cost is either constant or falling for the vast majority of firms. Since the wage rate is assumed constant, marginal cost and marginal product of labor have an inverse relationship-if the marginal product of labor is decreasing (or, increasing), then marginal cost is increasing (decreasing), and AVC = VC/Q=wL/Q = w/(Q/L) = w/AP L Empirical data on marginal cost If the cost function C is the change in quantity of labor that brings about a one-unit change in output. The marginal cost can be either short-run or long-run marginal cost, depending on what costs vary with output, since in the long run even building size is chosen to fit the desired output. For example, the marginal cost of producing an automobile will include the costs of labor and parts needed for the additional automobile but not the fixed cost of the factory building that do not change with output. Marginal cost is different from average cost, which is the total cost divided by the number of units produced.Īt each level of production and time period being considered, marginal cost includes all costs that vary with the level of production, whereas costs that do not vary with production are fixed. As Figure 1 shows, the marginal cost is measured in dollars per unit, whereas total cost is in dollars, and the marginal cost is the slope of the total cost, the rate at which it increases with output. In some contexts, it refers to an increment of one unit of output, and in others it refers to the rate of change of total cost as output is increased by an infinitesimal amount. In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. Cost added by producing one additional unit of a product or service

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