Marginal Cost Pricing

Smart Production: Should You Make One More?

This simple rule helps you decide how much to produce to make the most money.

1. What’s the “Marginal Cost” (MC)?

• The extra cost of producing one more unit.
• Example: For a t-shirt, it’s the cost of one blank shirt + a bit of ink + a few minutes of labor.
• Why: This is your “go/no-go” cost for the next unit.

2. What’s the “Marginal Revenue” (MR)?

• The extra money you get from selling one more unit.
• Example: The price you sell that t-shirt for.
• Why: This is your “value” for the next unit.

3. The Golden Rule of Profit:

• If MR > MC: [ ] Keep producing! Each extra unit adds to your profit.
• If MR < MC: [ ] Stop producing! That extra unit loses you money.
• If MR = MC: [ ] That’s your sweet spot! You’re making the maximum possible profit.

Your Action:

• For your main product, estimate your marginal cost.
• What’s your marginal revenue (price)?
• Are you producing where MR roughly equals MC?

Pitfall: Don’t confuse Marginal Cost with Average Cost. In the short run, it’s okay for price to be above marginal cost but below average cost if it helps cover fixed costs.

Golden Rule: Maximize profit by producing the quantity where the extra revenue from one more unit equals the extra cost of producing it.