Marginal cost pricing is setting the price of a product at or slightly above the variable cost of producing an additional unit. It is typically used in the short-term when a company has unused production capacity. Economists in the mid-20th century favored marginal cost pricing under perfect competition as it promotes efficiency, but others noted that sellers may not cover fixed costs using this approach. Marginal cost pricing determines the price based on the marginal cost needed for the product to break even or meet a profit target, but managers also consider demand and competition. It has been proposed for public utilities where marginal costs are low, but ignores long-run capacity investment needs.

1. Dr Sivasubramanian K
Assistant Professor, Department of Economics
Kristu Jayanti College, Autonomous
Bangalore-77
Marginal Cost Pricing

2. Marginal cost pricing is the practice of setting the price of a
product at or slightly above the variable cost to produce it. This
approach typically relates to short-term price setting situations. ... A
company has a small amount of remaining unused production
capacity available that it wishes to use
Marginal-cost pricing, in economics, the practice of setting
the price of a product to equal the extra cost of producing an extra
unit of output. By this policy, a producer charges, for each product
unit sold, only the addition to total cost resulting from materials and
direct labour. Businesses often set prices close to marginal cost
during periods of poor sales. If, for example, an item has a marginal
cost of $1.00 and a normal selling price is $2.00, the firm selling
the item might wish to lower the price to $1.10 if demand has
waned. The business would choose this approach because
the incremental profit of 10 cents from the transaction is better than
no sale at all.
Marginal Cost Pricing

3. In the mid-20th century, proponents of the ideal of
perfect competition—a scenario in which firms produce
nearly identical products and charge the same price—
favoured the efficiency inherent in the concept of
marginal-cost pricing. Economists such as Ronald Coase,
however, upheld the market’s ability to determine prices.
They supported the way in which market pricing signals
information about the goods being sold to buyers and
sellers, and they observed that sellers who were required
to price at marginal cost would risk failing to cover their
fixed costs.

4. Marginal-cost pricing
the setting of a PRICE for a product that is based upon the
MARGINAL COST of producing and distributing it.
a pricing method that sets the price for a product based upon
the CONTRIBUTION (i.e. price less unit VARIABLE
COST or marginal cost) needed for the product to BREAK
EVEN or provide a predetermined target level of PROFIT.
Unit contribution when multiplied by sales/production volu
me gives total contribution, and this contribution should pro
vide sufficient money to cover FIXED
COSTS (to break even) or fixed costs and target profit. To c
alculate selling price, it is necessary to add unit contribution
to unit variable cost or marginal cost. Although this pricing
method is based upon costs, in practice managers take into a
ccount demand and competition by varying the target unit co
ntribution. Compare FULL-COST PRICING.

5. a pricing principle that argues for setting prices equal to t
he marginal cost of production and distribution, ignoring
whether or not fixed costs are recouped from revenues. T
he principle has been advocated as a guide to the pricing
and output policies of PUBLIC UTILITIES on the ground
s that prices that reflect the marginal cost to society of pro
ducing an extra unit of output are more socially desirable.
The principle is particularly appealing when used for pub
lic utilities where marginal costs are effectively zero, such
as parks, bridges and museums, because here society can
be made better off by lowering the price of these facilities
until they are fully used. The marginal-
cost pricing principle however, deals only with the short-
run problem of generating an optimum price and output w
ith existing capacity and ignores the long-
run problem of ideal investment in new capacity. See also
AVERAGE-COST PRICING, TWO-PART TARIFF.

7. Thank You