Marginal Cost Theory

Marginal Cost Theory refers to the cost of producing one additional unit of a good or service. It helps businesses determine whether increasing production is financially beneficial. If the revenue generated from selling that extra unit exceeds its marginal cost, it makes sense to produce it. Conversely, if the marginal cost is higher than the revenue, the business should refrain from increasing production. This concept is crucial for decision-making in pricing, production levels, and resource allocation, ensuring that companies operate efficiently and maximize their profits.