Marginal Analysis

Topics: Economics, Costs, Marginal cost Pages: 2 (580 words) Published: February 11, 2013
Profit in business is a financial gain earned when marginal revenue exceeds marginal cost to produce a particular product or provide a service. Basically profit is the amount of money left after a business has paid all cost associated with doing business for a certain period of time from the total revenue taken in during that same period of time. All for profit business want to maximize their profits. Without making a profit a business cannot stay open without additional investment by the business owner. Ideally most businesses want to grow and to do that requires additional capital. In order to generate additional capital a business is best served by maximizing their profits. How does a business know if they are maximizing their profit potential? The business will need to determine what level of production will yield them the greatest profit and then strive to produce at that level. Marginal revenue or MR is the difference in revenue earned by a business from one additional unit of production or one fewer unit of production. Total revenue or TR is the sum of all sales made by a business for any quantity of the product or service they are selling. Total revenue is equal to the product or service price multiplied by the product or service provided quantity. TR will increase whenever MR is a positive amount. When MR is 0 then TR does not change and it is at the maximum. When MR is a negative amount TR is actually reduced because the cost to the business of additional sales is greater than the selling price. Marginal cost or MC is the difference in cost when a business produces one additional unit or one fewer unit. Total cost or TC is the sum of all cost to produce the product or provide a service and is determined by adding variable cost and fixed cost. A company has fixed cost at any level of production including no production at all. Fixed costs are typically incurred by the business in the short term. Some examples of fixed cost include rent, equipment...
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