To fully understand marginal cost analysis, it's important to know the difference between fixed costs and variable costs—two core components of cost classification in economics.
Fixed costs are expenses that stay the same regardless of how many units a business produces. These include things like rent, salaried labor, and equipment. Whether you produce 10 or 10,000 units, these costs don’t change. They are not part of marginal cost calculation.
In contrast, variable costs fluctuate with production volume. This includes materials, packaging, and hourly labor—costs that rise with each additional product. When calculating marginal cost, we focus only on how these costs increase as quantity of output increases.
For example, if it costs $100 to produce 10 units and $110 to produce 11, the marginal cost of producing the 11th unit is $10. This doesn’t include your fixed costs—only the additional variable cost of production.
Understanding the balance between fixed and variable costs supports better pricing, budgeting, and production efficiency, especially when using tools for marginal cost analysis and managing economies of scale in your business.