Egt1 for Western Governors

Topics: Economics, Marginal cost, Profit maximization Pages: 2 (384 words) Published: March 12, 2013
Marginal revenue is the amount added to total revenue by the sale of one more unit, which is equal to the change in total revenue divided by the change in quantity of the units sold. In a purely competitive market marginal revenue is equal to the price of the unit sold. In a pure monopoly marginal cost is always less than the price of the unit.

Marginal cost is the additional cost of production of one extra unit. It is equal to the change in total cost divided by the change in output. In the short run, marginal cost is equal to the change in total variable cost divided by the change in output.

Profit is the return on entrepreneurial ability; total revenue minus total cost. Profit, in this sense takes into account all the costs of business operation and the wage of the owner or entrepreneur, a wage that needs to exceed the entrepreneur’s ability to just go off and start another business instead of focusing on this one. Anything over the entrepreneur’s wage and the total cost would be considered profit.

Profit maximization is the point at which the marginal revenue of each resource is equal to its marginal cost. This is the quantity of each resource that must be employed to maximize profit or minimize loss. A profit maximizing company would use the marginal revenue minus the marginal cost rule to find the point of profit maximization. When output is relatively low the marginal revenue will usually exceed the marginal cost. At high output levels, however, the marginal cost rises over the marginal revenue. To maximize profit the firm must find the equilibrium where the marginal cost is as close to equal the marginal revenue as it can be without a fractional product.

If marginal revenue is higher than the marginal cost, a profit maximizing firm will continue to produce extra units of product. This is because it is still profitable for the company to produce. However, when the marginal cost exceeds the marginal revenue it is no longer profitable to produce...
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