Marginal cost is defined as the cost added by producing one more unit of a good or service. It is sometimes also referred to as the cost of the last unit. The concept of marginal cost is an essential part of economic theory because it’s one of the foundations of profit maximization. So if you are attending any economics classes, you’ll most likely have to calculate marginal cost at some point. Luckily, that’s not rocket science. We can calculate marginal costs in three simple steps:

1. Calculate the Change in Cost
In most cases, costs increase or decrease depending on the level of output. A higher output usually results in higher costs while a lower output results in lower costs. The reason for this is the existence of variable costs. Variable costs are costs that are directly related to the level of output and therefore increase or decrease proportionately. In addition to that, step costs (or step fixed costs) can also push costs if certain levels of output are reached.
Now with that being said, calculating the change in cost is really simple. All we have to do is take the cost before the change in output (that is, the old cost) and subtract it from the cost after the change (that is, the new cost).

2. Calculate the Change in Quantity
A change in quantity results from a change in the level of output. That means a higher output leads to a higher quantity supplied of a good or service and vice versa. Fortunately for us, calculating the change in quantity works just like calculating the change in cost. All we need to do is take the quantity before the change (that is, the old quantity) and subtract that from the quantity after the change (that is, the new quantity).

3. Divide the Change in Cost by the Change in Quantity
To understand why we divide the change in cost by the change in quantity, let’s take another look at the definition of marginal cost. We said that marginal cost is the increase in cost per additional unit of output. So by dividing the change in cost by the change in quantity, we can calculate marginal costs over any given range of output. And please keep in mind that the change in cost can vary as the level of output changes. That is, the marginal cost of selling 11 instead of 10 units may be different from the marginal cost of selling 101 units instead of 100, even though the change in quantity is the same.

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