Marginal Cost

As we have seen, the cost of producing 300 machines rather than no machines is 90 units of food. But it isn't really a question of producing 300 machines or nothing. Economia has to choose among all of the possible outputs of machines. The question always is "shall we produce one more machine? Yes or no?" The idea is to keep increasing the output of machines until the answer to that question switches from "yes" to "no." So the cost that is really relevant is not the cost of producing 300 machines, or 900, or whatever; but the cost of producing one more machine. We define marginal cost as the cost of producing one more machine. Marginal cost is always the concept of cost most important for the allocation of resources.

Marginal cost will vary as the output of machines varies. However, Table 1 does not give us quite enough information to compute the marginal costs for the different outputs of machines. For example, we can see from Table 1 that , if Economia increases its production of machines from 300 to 400, it will have to cut back on food from 910 units to 840 units, a difference of 70 units of food. Thus, 70 units of food is the cost of 100 more machines.

We can approximate the marginal cost -- the cost of one more machine -- in the following way, following the definition in Chapter 12: First, looking at Table 1, we know that the total cost of producing 300 machines is 90 units of food and the total cost of producing 400 machines is 160. Let us call then change in the quantity of machines Δ machines, and the resulting change in cost Δ cost. We have Δ machines= 400-300 = 100, and Δ cost = 160-90=70 units of food. Now,

Thus, we compute that the marginal cost of going from 300 to 400 machines is approximately 70/100 = 0.70 units of food per machine.