Firms face three main decisions: (1) quantity of output to supply, (2) production technique to use, and (3) quantity of inputs to demand. These decisions are based on the price of output, available production techniques, and input prices.
In the short run, firms have fixed costs that do not depend on output level. They also have variable costs that vary with output. Total cost is the sum of total fixed and total variable costs. Marginal cost is the change in total cost from producing one additional unit. It reflects changes in variable costs only. As a firm approaches its short-run capacity, marginal costs will ultimately increase with output.