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What Is Short Run Marginal Cost?

Jim B.
Jim B.

Short run marginal cost is a measurement of the cost a business firm will incur to produce a single unit of output. The key to this concept is the fact that this cost is incurred in the short run, which assumes that certain business inputs are fixed and only the cost of actually producing the items will change. It is important to understand that the short run marginal cost may vary as production increases depending on the way production is executed. This concept is important for businesses to understand when they are trying to determine whether filling out a production order will be profitable or not.

Businesses that engage in large-scale production must be cognizant of the costs they are incurring along the way. All businesses strive to make a profit, and that won't happen when costs for the production of goods exceeds the amount for which those goods can be sold. The short run marginal cost is a crucial factor in business decision-making, since it will ultimately affect the total costs of production.

To put it simply, the short run marginal cost is the amount of money that it will take for a business to produce one more unit for sale. For example, if a sporting goods company could always produce bowling balls at a price of \$10 US Dollars (USD) per ball, the marginal cost would be \$10 USD. That number is then multiplied to the amount of balls produced to yield the total variable cost. Variable costs are added to the fixed costs of operation for the total production cost.

Of course, it is rare that a business can produce items at exactly the same rate all the time. In many cases, the law of diminishing returns, which states that it will take more money to produce the same amount of items as production increases, prevails for production of large quantities. For that reason, the short run marginal cost must be weighed at each stage of production to determine when total costs are at their optimum level for profits.

When calculating the short run marginal cost, it is important to understand just what is meant, in economic terms, by the short run. The short run is that period of time in which certain inputs for production, such as rent paid on factories or salaries paid to staff, cannot be changed. As a result, those costs will be incurred no matter how much production is taking place and will always affect the total costs of production.