What is Marginal Cost?

The definition
The formulas

Marginal cost is the extra cost of producing one more unit, whether that's one more product or one more job. You calculate it by dividing the change in your total cost by the change in the number of units. Your fixed costs, like rent, don't change when you make one more unit, so marginal cost comes from the costs that rise with output, like materials and labor.

The definition

OpenStax's Principles of Economics 3e (section 7.3, opened October 29, 2026) says:

"Marginal cost is the additional cost of producing one more unit of output. It is not the cost per unit of all units produced, but only the next one (or next few). We calculate marginal cost by taking the change in total cost and dividing it by the change in quantity."

OpenStax's example is a barber shop, so the "unit" can be a service, such as one haircut. It describes the two kinds of cost this way:

Fixed costs: "expenditures that do not change regardless of the level of production." Its example is "the rent on a factory or a retail space."
Variable costs: "the costs of the variable inputs (e.g., labor)." They "increase or decrease with output" and "would also include raw materials."

The formulas

Marginal cost = change in total cost ÷ change in quantity.
Average total cost = total cost ÷ quantity.
Total cost = fixed costs + variable costs.

Fixed costs stay the same, so the change in total cost equals the change in variable costs.

Worked example: a print shop's next order

The figures here are a sample. A print shop's fixed costs are $500 a week. Its variable costs (paper, ink and labor) are $1,000 to print 100 posters, $1,240 for 120 posters and $1,540 for 140 posters. Beyond 120 posters, it pays overtime.

Total cost:
- 100 posters: $500 + $1,000 = $1,500;
- 120 posters: $500 + $1,240 = $1,740;
- 140 posters: $500 + $1,540 = $2,040.
Marginal cost from 100 to 120: ($1,740 − $1,500) ÷ 20 = $12 per poster.
Marginal cost from 120 to 140: ($2,040 − $1,740) ÷ 20 = $15 per poster.
Average total cost:
- $1,500 ÷ 100 = $15.00;
- $1,740 ÷ 120 = $14.50;
- $2,040 ÷ 140 = $14.57.

The $500 of fixed costs doesn't affect marginal cost. From 100 to 120, variable costs rise by $1,240 − $1,000 = $240, the same $240 increase as in total cost.

The averages move the way OpenStax describes. When the marginal cost ($12) is below the average ($15.00), the average falls, to $14.50. When the marginal cost ($15) is above the average ($14.50), the average rises, to $14.57. In OpenStax's words, "low marginal costs of production first pull down average costs and then higher marginal costs pull them up."

Using marginal cost to price an extra order

Compare the price of an extra order with its marginal cost. In the sample, a customer offers $13 a poster for 20 more posters:

At 100 posters a week: the extra revenue is 20 × $13 = $260, and the extra cost is $240. The order adds $20 to profit.
At 120 posters a week: the extra revenue is still $260, but the extra cost is $300 because of overtime. The order reduces profit by $40.

For an extra order, the marginal cost is a price floor: below it, the order costs more than it brings in. Over time, your prices also have to cover your fixed costs, so it's a floor for extra orders, not a price list. The break-even calculator works from fixed costs, price and variable cost per unit. For average cost per unit, use the cost per unit calculator.

Marginal cost vs. average cost

Average total cost spreads all your costs, fixed and variable, over all your units.
Marginal cost looks only at the cost of the next unit or the next batch.

OpenStax notes that variable costs "at some point" begin "increasing at an increasing rate," which it attributes to diminishing marginal productivity. That's why marginal cost can rise as you get busier, as with the overtime in the sample.

Where Billed fits

Billed's expense and receipt tracking page says an expense "records who you paid, when, how much and which category it belongs to," and that "Billed's expense report can group your expenses by category." Categories that separate costs that rise with output, such as materials and contractor fees, from fixed costs, such as rent, give you the inputs for this calculation. Billed's expense and receipt tracking page doesn't calculate marginal cost.

Frequently Asked Questions

How do you calculate marginal cost?

Divide the change in total cost by the change in quantity. If total cost rises from $1,500 to $1,740 when output goes from 100 to 120 units, the marginal cost is $240 divided by 20, or $12 per unit.

What is the difference between marginal cost and average cost?

Average total cost is total cost divided by the number of units, so it includes fixed costs spread over every unit. Marginal cost is the extra cost of the next unit or batch only, so fixed costs that don't change are left out.

Do fixed costs affect marginal cost?

Not while they stay the same. Fixed costs like rent don't change when you produce one more unit, so the change in total cost comes from variable costs such as materials and labor.

Why does marginal cost rise as output increases?

OpenStax explains that variable costs at some point begin increasing at an increasing rate because of diminishing marginal productivity. In practice, that can mean overtime, rush shipping or extra staff as you approach capacity.

How does marginal cost help with pricing?

For an extra order, compare the price with the marginal cost of filling it. If the price is above the marginal cost, the order adds to profit. If it's below, the order reduces profit. Your regular prices also need to cover fixed costs over time.

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