Starting a business is a delicate process that can be easily ruined if the owner doesn’t know how to maximize it profits. In order to make sure the business is obtaining the highest level of return the owner must ensure that he understands the concept of profit maximization. This essay will explain the relationship between marginal costs and revenue to give the firm a better understanding in profit maximization. To better understand how to maximize revenue the firm must first comprehend marginal revenue and how it relates to total revenue. Marginal revenue is the change in total revenue from the sale in one additional unit of product (McConnell, Bruce, Flynn, 2012). For example, two lamps that sell for six dollars total revenue is twelve dollars. This answer is found by using the formula quantity x price. If an additional lamp was produced, the marginal revenue would show if there was any change to the total previously found. To find the marginal revenue one must divide the total revenue by the quantity of items sold. Fortunately, in a competitive market the marginal revenue will also equal the price of the good. Another area a business owner should be proficient in is marginal cost and how it relates to total cost. Marginal cost is the increase in total cost, which is variable and fixed costs combined, as one more unit of output is produced (McConnell et al., 2012). They are related because in order to know if marginal costs are higher or lower as an additional unit is produced you must first know the total cost to produce that item. For example, the fixed cost of producing one glass of lemonade is 3.00 and the variable is .30 this make the total cost of production 3.30. But if you produce two glasses the variable cost changes to .50 making the total cost to fix the additional glass 3.80. To find the marginal cost or to find out how much more it cost to produce that second unit of lemonade one must divide the total cost by the change in
References: McConnell, C.R., Brue, S.L., Flynn, S. (2012) Economics (19c). McGraw-Hill. ISBN: 9780077337865. Pgs. G1-G30.