What Is Marginal Private Cost?

Marginal private cost is a term that is used to identify the change in cost that is involved when the production or consumption of a good or service is changed by a single unit. This type of calculation may be used by individual consumers as well as by companies, allowing both to determine if making that change is really the best approach. Taking the time to accurately calculate the marginal private cost can aid in planning budgets and schedules more effectively, making it possible to make more efficient use of available resources.

As it relates to the individual consumer, marginal private cost can help determine the amount of benefit derived from spending a little more and acquiring one additional unit of a good or service that is routinely used. The cost of that additional acquisition can be weighed against the benefits associated with having access to the addition and deciding if the additional cost is justified. For example, if a consumer has the option of buying one brand of cake mix at a fixed price, or purchasing a different brand that is slightly higher in cost but is currently on sale as a buy one get one free item, the marginal private cost will be the difference between the price of the two brands. The benefit is the ability to bake two cakes rather than one, effectively driving down the overall cost of preparing the two cakes, making the deal cost effective for the consumer.

In like manner, marginal private cost can also be related to a business owner attempting to decide if producing one additional unit of a good or service is worth the time and effort. A baker may find that increasing the production of cakes by one per day results in increasing the marginal private cost of baking cakes by only 10%. While there is a small amount of marginal private cost involved, it is easily offset by the additional profit made when all the cakes produced are sold at the standard and usual price. In like manner, a manufacturer may find that the cost of production for one additional unit of a good only increases the marginal private cost by $20 US dollars. Assuming that all the units produced are sold at a retail price of $50 USD each, there is a good chance that the benefits of producing that one additional unit easily offset the total cost of production.