A marginal cost is the change in total costs resulting from a one unit change in output. In economic terms, this represents the cost of producing an additional unit of a product or, conversely, the cost savings from reducing production by one unit.
In Life Cycle Assessment, the concept of marginal costs plays a crucial role in consequential LCA modelling. When assessing the environmental impacts of a decision to increase or decrease demand for a product, it is essential to identify which activities will actually change their production volumes in response. Activities with lower marginal costs are typically better positioned to respond to changes in demand, as they can profitably supply additional units at competitive prices.
Understanding marginal costs helps distinguish between constrained and unconstrained activities. Constrained activities operate at or near their production capacity and face high marginal costs for expansion, making them unlikely to respond to small changes in demand. Unconstrained activities, by contrast, have spare capacity and lower marginal costs, enabling them to adjust production volumes more readily. This distinction is fundamental to identifying marginal suppliers in consequential LCA.
The marginal cost differs from the average cost of production, which represents the total costs divided by the total output. An activity might have low average costs due to economies of scale whilst simultaneously facing high marginal costs if it operates near capacity. For LCA practitioners, the marginal cost provides insight into which production systems will likely expand or contract in response to changes in product demand, thereby determining which activities should be included in a consequential product system model.
In markets where production capacity is available and suppliers compete, the marginal cost of the most competitive suppliers tends to set the market price in equilibrium. This relationship between marginal costs and market dynamics underpins the identification of marginal technologies in consequential LCA.
