Marginal cost is the cost to produce an additional unit of product, while marginal product is the additional output generated by an additional unit of input. They are inversely related due to the law of diminishing returns, and when marginal product is at its highest, marginal cost is at its lowest. Marginal cost is calculated by dividing the cost of hiring an additional worker by the marginal product of that worker.
In economics, marginal cost represents the total cost to produce one additional unit of product or product. Marginal product is the additional output generated by an additional unit of input, such as an additional worker. Marginal cost and marginal product are inversely related to each other: as one increases, the other will automatically decrease proportionally, and vice versa.
The relationship between marginal cost and marginal product can be attributed to the law of diminishing returns, a central concept in the field of economics. This law states that as one continues to add resources or inputs to production, the cost per unit will first decrease, then bottom out, and finally begin to rise again. For example, a company may add a new worker to its manufacturing operations. This new employee helps the company increase its total output and may also increase marginal product. However, after too many workers have been added, employees can waste time waiting to use tools and equipment, or simply commute each other, resulting in higher marginal cost.
Because of the inverse relationship between marginal cost and product, marginal product will always be at its maximum just as marginal cost reaches its minimum. The converse is also true, where marginal product is at its minimum level as marginal cost reaches its maximum level. Graphically, the two are illustrated as mirror images of each other. When marginal product is at its highest possible level and marginal cost is at its lowest, diminishing returns begin to set in and marginal cost will begin to rise.
Marginal cost is equal to the cost of hiring an additional worker, or adding a unit of input, divided by the marginal product of that worker or unit or input. If each new worker costs $10 US dollars (USD) and increases output by 10 units, the marginal cost of a worker can be calculated as $10 divided by 10 units: $1 USD per unit.
The 10th worker hired by the company still costs $10, but may only be able to produce an additional five units due to overcrowding on the production floor. Your marginal cost can be calculated as $10 divided by five units, or $2 per unit. This higher marginal cost is due to the law of diminishing returns. In the long run, it may be possible to affect marginal cost and marginal product by expanding capacity and adding new machines, equipment, or floor space.
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