What is an example of marginal cost?


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There is no such thing as an example of marginal cost. Margiinal cost is an abstraction which illustrates an economic principal. The term can be ascribed to any cost factor of production which is involved in generating sales and profit. In Text speak, marginal cost would be the units of additional cost that would be required to achieve some certain higher level of productive output . . . That is to say, sales and income. Inherent in the concept of marginal cost is the parallel concept of diminishing return. This means, that as more and more units of cost is "invested," at the production level, at some point the amount of cost investment and the return in gross sales will begin to move in opposite directions . . . More cost will not longer produce more profit, but will grow to a point at which profit begins to decline because (1) there is not enough increase in the number of customers to cover the extra cost and (2) the cost cannot be reduced sufficiently to maintain the same level of profitablity given a customer base that grows increasingly "saturated" with your product that have already been purchased. So, when you speak of marginal cost, it is not some discrete element of cost such as a commodity. Instead, it is a way of relating some amount of pruducton cost factors to the revenue it will produce. One wants ultimately to know how to determine how much additional cost to incur even in the face of dimishing return on each additional increment of cost.

We often hear of marginal costs from small business people when a sale tax increase is proposed. We might think that the sale tax paying merchant would need only to add the amount of the tax increase to the sell price; so are surprise to hear the merchant say that he will have to raise the sale price to cover the increase in marginal cost created by the tax, or increase sales volume if he can, or settle for lower profit margin. What does the merchant have in mind, we might ask. Suppose you, as a merchant, are selling a product, let's say cigarettes, and through experience have arrived at the exact inventory level you need to meet customer demand at a price that returns an acceptably high level of profit. This means, in terms of marginal cost, that you customers have just the right amount of disposable income to purchase your cigarette inventory in sufficient quantity and in steady enough fashion that you will be able to replenish you inventory at a continuing, optimal level. During that time, say, you have been collecting  and paying, say, a tax of $1 on each cigarette pack unit sold. Now the state passes a tax increase of $1, so you will now be compelled to pay and collect $2 on each unit sold. You must now decide whether or not you want to collect back all of the now $2 tax you are liable for, or absorb some of the tax (which is an increase cost to you) as a loss. You decide to collect all of the increase as an addition to the price of your cigarette packages. Even though you are being reimburse for your cost of the tax, what is you cost now as relates to the amount of inventory you will sell. You reaize that if your marginal cost of supplying an optimal level of unit sales had been, say, X + $1, that means that your customers had just the right amount of money to buy your products at that price and frequency. But, now you are taking an additional dollar out of your customers' disposable income on behalf of the government. Some or all of those dollars extracted for government are dollars that won't be spend on your cigarettes. Therefore if you sell less you will have to reduce your inventory - you marginal cost of carrying that inventory has increased  relative to the number of units you will be able to sell. So now you are selling a smaller stock of cigarettes, so the amout of revenue returned for the smaller inventory has been reduced . .  . Perhaps to the point where you only break even or are taking losses. Obviously the margnal cost of trying to increase sale volume  by increasing inventory is too high. So you are forced to raise prices to cover that addtional marginal cost represented by the tax which removes peoples power to buy your product.

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