Marginal cost is what it costs to make one more unit of something. Suppose a campus bakery has already baked 100 loaves today. The marginal cost of loaf number 101 is the flour, yeast, and electricity that loaf requires — not the rent on the kitchen or the price of the oven, which are already paid and do not change whether the bakery bakes 100 loaves or 101. Only the costs that change with that extra unit belong in marginal cost.

Formally, marginal cost is the change in total cost ($TC$) divided by the change in quantity ($Q$). When output is a smooth, continuous variable, marginal cost is the derivative of total cost with respect to quantity. Marginal cost curves are typically U-shaped: they fall at first as a firm uses its fixed inputs more efficiently, then rise once diminishing returns set in — each additional unit of output requires ever more variable input. A profit-maximizing firm keeps producing as long as the extra revenue from a unit exceeds its marginal cost, stopping where marginal cost equals marginal revenue ($MC = MR$). Marginal cost is itself an opportunity cost: the resources used to produce that extra unit could have been employed elsewhere.