There a many factors that a company will review before knowing the maximum profit that can be obtained for their industry. Marginal revenue, marginal cost, total cost and profit-maximizing are some of the concepts that are analyzed when making business production decisions.
Marginal revenue is the total revenue that is changed when one more unit of output is produced. The total revenue is determined by multiplying the unit price by what quantity the company can sell. The total revenue increases when the first unit is purchased and equals the marginal revenue. When the second unit is produced, the total revenue will increase, but the marginal revenue will stay at the same original cost. Marginal revenue and price will remain equal in a pure competition market when the first unit is sold. Marginal revenue is equal to the change in total revenue over the change in quantity when the change in quantity is equal to one unit. When the second unit is sold, marginal revenue will stay the same and total revenue will double in cost. When selling another unit increases total revenue, the marginal revenue must be greater than zero. When marginal revenue is less than zero, then selling another unit takes away from total revenue. When marginal revenue is zero, than selling another does not change total revenue. This relationship exists because marginal revenue measures the slope of the total revenue curve.
Marginal cost is the extra cost of producing one additional unit of output. Marginal cost can be found by dividing the total cost and the production details of that unit. The total cost includes both fixed and variable cost with each level of output. Fixed costs are costs that stay the same with different levels of output, such as rent, insurance and equipment. Variable costs, such as fuel, materials and power, will vary when output levels change. The marginal cost can be found for each additional unit of output by verifying the change in total cost that each...
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