Why is marginal costing important?

Marginal cost is important in economic analysis and is used by various production firms to calculate their profit maximization output. Marginal cost is the first derivative of the total cost with respect to output produced and hence, shows the rate of change of cost with respect to the rate of change in total output.

Mathematically, it is denoted as:

Marginal Cost = DTC/DQ

Marginal cost along with the marginal revenue forms the basis of deciding the profit-maximizing output for a firm. A profit-maximizing firm will always choose to produce on a point where its marginal cost is equal to its marginal revenues. This is because marginal cost depicts a change in the cost with respect to change in one unit of output and marginal revenue depicts a change in the revenue with one unit change in output. A rational firm will always choose to produce on the point where its additional cost is matching the additional revenues from the production. Therefore, it can be stated that marginal cost plays an important role in deciding the optimum level of production for a firm.