Question

Why is it OK that are there two definitions for Marginal Cost (and Marginal Revenue, and Marginal Profit)? Explain & give example.

Answer 1

Marginal cost, by definition, is the cost of producing every incremental unit of product. Similarly, marginal revenue is the incremental revenue for each additional unit of product sold.

For example, the total cost of making 1 unit is $40 and the total cost of making 2 units is $55. The marginal cost of producing the second unit is $55 – $40 = $15.

In practice, however, this is divided into short-run and ling-run cost and revenues. The difference between the two is based on the underlying factors of production (usually assumed to be labor and capital). The short-run marginal cost can be defined as the amount it costs to produce one additional unit assuming at least one factor of production is fixed at some level. On the other hand, in the since all factors of production are variable in long run, the long-run marginal cost can be said to be the amount it costs to produce one new unit, assuming all factors of production can be freely chosen.