Topics: Costs, Marginal cost, Variable cost Pages: 2 (577 words) Published: December 6, 2012
The relationship between marginal cost (MC) and marginal revenue (MR) is fairly easy to see, marginal cost is the extra cost from the production on one or more units of a particular item verses marginal revenue is the change in total revenue from the sale of one or more units of a particular item. There is a principal that explains the relationship between the two best called the MR=MC rule, which states “that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost” (McConnell, 2012). Marginal revenue is the change in total revenue related to one or more units of a particular item, where as total revenue is the total dollar amount gained for all items a company sells. Marginal revenue is calculated by dividing the change in total revenue by the change in sales. So, when marginal revenue is equal to marginal cost, no additional profit will be made from increasing units. Total revenue is calculated by adding the economic profit, implicit costs and explicit costs or the accounting profit plus that accounting costs (explicit costs only). Marginal cost is the added cost for a company to make one or more units of production. Total cost (TC) is the combination of all variable and fixed cost expenses at various levels of production. The total fixed costs are steady costs that are not dependent on the level of output and remain the same no matter how much product is produced verses that variable total costs increase or decrease depending on the number of items produced in a particular time period. To calculate marginal cost, you would need to divide the total cost by the total output. “Marginal costs are costs the firm can control directly and immediately. Specifically, MC designates all the cost incurred in producing the last unit of output. Thus, it also designates the cost that can be “saved” by not producing that...