In economics, marginal cost represents the total cost to produce one additional unit of product or output. Marginal product is the extra output generated by one additional unit of input, such as an additional worker. Marginal cost and marginal product are inversely related to one another, and as one increases, the other will automatically decrease. The inverse relationship between marginal cost and marginal product also works in reverse, so that as one of these costs decreases, the other will naturally increase proportionally.

The relationship between marginal cost and marginal product can be attributed to the law of diminishing returns, a central concept in the field of economics. The law of diminishing returns states that as one continues to add resources, or inputs to production, the cost per unit will first decline, then bottom out, and finally start to rise again. For a simple example, consider a company that adds a new worker to its manufacturing operations. This new employee helps the firm increase total output, and may also increase marginal product. After too many workers have been added, however, employees may find themselves wasting time waiting to use tools and equipment, or simply crowding one another out, resulting in a higher marginal cost.

Due to the inverse relationship between marginal cost and marginal product, marginal product will always be at its maximum level just as marginal cost reaches its minimum point. The opposite is also true, where marginal product is at its minimum level as marginal cost reaches the maximum level. Graphically, marginal cost and marginal product are illustrated as mirror images to one another. When marginal product is at the highest possible level and marginal cost is at its lowest point, diminishing returns begin to set in, and marginal cost will begin to rise.

Marginal cost is equal to the cost of hiring an additional worker, or adding a unit of input, divided by the marginal product of that worker or unit or input. For a simple example, consider a company where each new worker costs $10 US Dollars (USD), and increases output by 10 units. His marginal cost can be calculated as $10 USD divided by 10 units, resulting in a marginal cost of $1 USD per unit.

Now suppose the 10th worker hired by the company still costs $10 USD, but can only produce an additional five units due to overcrowding on the production floor. His marginal cost can be calculated as $10 USD divided by five units, or $2 USD per unit. This higher marginal cost is due to the law of diminishing returns. In the long run, it may be possible to impact marginal cost and marginal product by expanding capacity and adding new machines, equipment or floor space.