The paper assumes an implicitly given production function with capital and labor and derives marginal costs from it. Further, it analyzes conditions under which marginal costs change. Finally, based on the derived structure of marginal costs, capital and labor market policies for affecting firm-level behavior are discussed, which economics students easily understand. Understanding marginal costs is essential to interpreting firm-level and aggregate equilibrium outcomes. However, microeconomics

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... tudents rarely see a full-fledged derivation of those costs in either introductory or advanced-level microeconomics courses. In the standard introductorylevel textbook literature, the issue of the structure of marginal costs is too early to grasp, and hence is left out (e.g. issue is left out because it is either assumed to be known a priori, or trivial. It can also be left out or because the textbook allegedly needs to deal with more important issues for the advanced students. As a result, students rarely understand the intuition behind marginal costs, and assume them as given -which they are not. A direct implication is that students do not see exactly how certain rational capital and labor market policies work at the level, at which they matter most -the firm. This is an issue, because it hampers the acceptance of the fundamental mechanics of microeconomics. To remedy the issue, I propose a simple derivation of marginal costs, which holds both pedagogical and policy implications. The derivation is a standard procedure used in advanced microeconomics classes in Western schools, and arrives at the basic structure of marginal costs. The derivation procedure starts with an implicit production function: , where the quantity of output Q is a function of the quantities of capital (K) and labor (L). To produce Q, however, the firm needs to pay factor prices, and hire factors with varying productivities. Therefore, the total costs of the firm are directly affected by how much the firm produces, which is further related to the amounts of capital and labor that the firm hires: . As marginal costs are, by definition, equal to , we first need to totally differentiate the cost function: .