Marginal Revenue can be termed as the change in the total revenue from an additional unit that is sold by a firm. Example, the total revenue when 10 units are sold is $50, and total revenue when 11 units are sold is $55. Marginal Revenue in this case will be (55-50)/(11-10) = $5.
One can compute the total revenue if the marginal revue and the number of units sold. If the marginal revenue of a product is zero than the total revenue will not change with an increase in the number of units sold. Marginal Cost:
Marginal Cost can be termed as the change in the total cost from an additional unit that is produced by a firm. Example, the total cost when 10 units are produced is $30, and total cost incurred when 11 units are produced is $33. Marginal Cost in this case will be (33-30)/(11-10) = $3.
One can compute the total cost if the marginal cost and the number of units produced are given. If the marginal cost of a product is zero than the total cost will not change with an increase in the number of products manufactured. Profit Maximization:
Profit maximization is the main goal of a competitive organization, profit is equal to total revenue less total cost. The profit maximization unit is the point of equilibrium where marginal cost is equal to marginal revenue.
This is the point of equilibrium which helps in determining the demand curve so as to analyze the price at which profit maximization level of output will be demanded. When the marginal revenue is more than the marginal cost then the firm is earning super natural profit and it will continue to produce till the marginal revenue is equal to marginal cost. If the marginal cost is more than marginal revenue then the firm needs to focus on reducing the cost of production and increase the cost at which the price is sold till the firm’s marginal revenue is equal to marginal cost. The total revenue-total cost method is one way the firm determines the level of output that maximizes...
References: N. Gregory Mankiw, (2002), Principles of Economics, 2nd Edition
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