## >> Wednesday, May 27, 2009 Definition of Marginal Cost

Alfred Marshall invented the famous economics word marginal, it means, one more unit. If we produce one more unit of product, the changes in total cost are called marginal cost. The formula of marginal cost is

= TCn – TCn-1

If we make table with different units of production and records it marginal cost and when it will present on graph, this curve which shows marginal cost is called marginal cost curve.

There are many reasons beyond making marginal cost curve U Shaped. One by one we are explaining all causes with simple way in following manners.

Ist reason

Decreasing of Average fixed cost curve

Average fixed cost curve effects marginal cost curve. With fast decreasing the value of average fixed cost , the value of marginal cost also decreases and marginal cost curve becomes negative , after some time fixed and average fixed costs leave this trend to reducing , and its direct effect will on shown on marginal cost curve’s direct , it turns upward with increasing marginal cost .

2nd reason

Indivisibility of factors of production

Fixed factors of production are indivisible and from this quality of fixed factors gets some internal economies and it decreases the marginal cost which is calculated total cost but total cost’s main part is fixed cost and its indivisibility surely effects marginal cost curve after some time due to increasing internal diseconomies, fixed cost started to increase and with this effect marginal cost curve turns upward.

3rd reason

Applying the law of variable proportion

Marginal cost curve is u shaped due to applying the law of variable proportion. In simple words variable proportion law tells us that when we use any variable resource with other fixed resource , production will change in three stages , first total production will increase , it will decrease the marginal cost , then total production will unchanged and marginal cost will reach on bottom point , after this total production will started to decrease because , we can not use of variable factors as the substitute of fixed resources all time , after effective use of fixed resources , it needs more because of increasing production but non availability of fixed resources , marginal cost will increase and after this we can see the u shape of marginal cost curve .

4th reason

Variable sources are substitute but not perfect substitute

There are two main variable source of production , one is labour and other is capital , if we start to increasing production by more applying one variable source of production , it is substitute of capital resource for some time but it is not perfect substitute and after some time cost of labourer will increase and marginal cost curve will turn upward . This reason is so important for taking decisions of production because manager will see what proportion should be fixed for getting optimum output at minimum cost. |