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. The policy is used to maintain a low selling price or to keep a business operating during a period of poor sales. For example, a firm temporarily experiencing poor sales might want to keep its workers employed and ready for an expected upturn. Since fixed costs such as rent and building maintenance must be paid regardless of whether the workers are employed, the company can decide to remain in production and sell the product at marginal cost, thus losing no more money than it would if the workers were laid off and nothing was manufactured.