Incremental Cost

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Definition of 'Incremental Cost'

Incremental cost is the additional cost incurred when one more unit of a good or service is produced. It is the difference between the total cost of producing two units of a good and the total cost of producing one unit.

Incremental cost is an important concept in economics and business. It is used to make decisions about how much to produce, how to price products, and how to allocate resources.

For example, a company may want to know how much it will cost to produce a new product. The company can calculate the incremental cost of producing the new product by adding up the cost of the new materials, labor, and other resources that will be needed to produce the product. The company can then use this information to decide whether or not to produce the new product.

Incremental cost is also used to set prices for products. A company may want to know how much it can charge for a product without losing money. The company can calculate the incremental cost of producing the product and then add a markup to the cost to determine the price.

Finally, incremental cost is used to allocate resources. A company may have a limited amount of resources, such as money, labor, or time. The company can use incremental cost to determine which projects or products are the most important to invest in.

Incremental cost is a valuable tool for making decisions about production, pricing, and resource allocation. By understanding incremental cost, companies can make better decisions that will help them to be more profitable.

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