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Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit. It is most often used among manufacturers as a means of identifying an optimum production level.

The formula for marginal costs of production is:

Change in total production costs/Change in total quantity produced

Marginal cost of production is best used to determine when a company can reach an economy of scale to optimize production and overall operations.

Notice the difference between fixed and variable costs.  A company must incur certain fixed costs in order to operate.  For instance, it has to purchase machinery for its production line.  When the company allocates a machine’s costs to the production run, the fixed cost spreads thinner as production increases. Variable costs, on the other hand, tend to rise with increased production, due to increased use of raw materials, labor and utilities.

Marginal costs of production will keep going down as production rises until the company has to incur more costs to produce more products.  For instance, it may need to buy another machine, add warehouses or buy more materials.  At that point, the next unit produced will have a higher marginal cost of production.   

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