In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit
Profits are maximized when marginal costs equals marginal revenue because fixed costs are now spread over a larger amount of revenue. This means that total cost per unit declines and profits increase. Another way to say this is that this is the effect of scale. When marginal revenue equals marginal costs, in a growing revenue situation, you gain economies of scale and higher profits.
The term marginal cost refers to the oppurtunity cost associated with producing one more additional unit of a good. Opportunity cost is a critical concept to economics - it refers to the value of the highest value alternative opportunity. For example, in examining the marginal cost of producing one more bushel of wheat, that number could be expressed as the dollar value of corn or other goods that could be produced in lieu of more wheat. Marginal benefit refers to what people are willing to give up in order to obtain one more unit of a good, while marginal cost refers to the value of what is given up in order to produce that additional unit. Additional units of a good should be produced as long as marginal benefit exceeds marginal cost. It would be inefficient to produce goods when the marginal benefit is less than the marginal cost. Therefore an efficient level of product is achieved when marginal benefit is equal to marginal cost.
It helps producers decide how much of a good to make.
The breakeven amount for a particular loan varies from bank-to-bank and customer-to-customer. To give an example, we will use a basic installment loan that is taken from an average consumer. Say an existing customer takes a personal loan for $3,000 and the loan will last for twelve (12) months. The company has to account for the following MARGINAL elements in order to make a profit: * Acquisition costs (how much did it cost to acquire the customer) * Cost of funds (how much do they pay to borrow money that they will loan) * Charge-off Rate (what is the rate of default for a similar average customer) * Underwriting costs (how much does it cost to underwrite the loan) * Onboarding costs (how much does it cost to setup the account) * Servicing costs (how much does it cost to send statements, take payments, report to the credit bureau, etc.) * Payoff costs (how much does it cost to close the loan) Making assumptions for each of the items on a marginal basis: * Acquisition costs are $0 (we stated that the borrower was already a customer) * Cost of funds is 2%, or $60 * Charge-off rate is 5% (or $150) * Underwriting costs are $40 * Onboarding costs are $30 * Servicing costs for 12 months at $2/month is $24 * Payoff costs are $10 So, the basic marginal expense is $164 if we ignore chargeoffs. We will assume that the client does not chargeoff, so the rate needed to break even is: $164 / $3000 = 5.47% However, on average, 5% of customers DO chargeoff, so to account for that we might add $150 to the costs as follows: $314 / $3000 = 10.47% Most banks want to earn 1% on the asset side and 1% on the liability side, so the bank would likely price the loan at 11.49% or 11.99% for a "good risk" customer.
Marginal cost generally falls as quantity increases becausepeople learn to do their jobs better as they produce more
If marginal costs are relevant for specific situation or specific decision making scenario then marginal costs are relevant costs otherwise marginal costs can be irrelevant.
One is able to learn about marginal costs at several different places online, such as at the following websites: the Wikipedia Marginal Costs webpage, Marginal Cost, and Margins.
Profits will be maximized when marginal revenue is equal to marginal costs. This will only happen in cases where there are fixed costs.
Rational Decision making occurs when marginal benefits of an action exceed the marginal costs
equal to marginal revenue
equal to marginal revenue
The most profitable output level is when marginal costs equals marginal revenue. When marginal revenue is larger than marginal cost, that means that more product can be produced for more profit.
The optimal level of output is where marginal costs = marginal damages.
Marginal benefits and marginal costs
Where the marginal benefits equal marginal costs.
A company maximizes profits when marginal revenue equals marginal costs.
when marginal costs are below average cost at a given output, one candeduce that, if output increases dose average costs fall or marginal costs will fall