Marginal Analysis and Profit Maximization

Topics: Costs, Economics, Variable cost Pages: 3 (971 words) Published: February 5, 2012
Marginal Analysis and Profit Maximization

At the point of profit maximization within any firm, the aspects of both marginal revenue and marginal cost play a major role. The economically working definition of marginal revenue is termed as: the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price (MoneyTerms, 2005). The marginal revenue of the output of any given product ties closely in the total revenue, because, dependent upon the final amount of additional units sold, the total revenue of a product can be determined. A fluctuation in the marginal revenue is equivalent to the final calculated total revenue. Businesses establish and define total revenue by multiplying the price of an item for sale by the number of items that sold. Demand for products, which can be elastic, affect the total revenue of the companies that sell those items. Marginal revenue looks at changes in total revenue and the change in quantity sold. Marginal Revenue = (Change in total revenue) divided by (Change in quantity sold). For example, assume you sell cookies for \$2/bag and can sell 400 at that price. If you change the price to \$1.50, you may sell 550. The total revenue at \$2 is \$800 (\$2 x 400). The total revenue at \$1.50 is \$825 (\$1.5 x 550). Therefore, the change in revenue is \$75 (\$900 - \$825). Next, you want to find the change in quantity. In the example, the change in quantity is 150 bags (550 - 400). Lastly, to calculate marginal revenue, divide the change in total revenue by the change in quantity sold. In the example, the marginal revenue is \$.50 per unit (\$75 / 150).

Marginal cost has a direct relationship with total cost in that it varies once one more unit of production has been created. So, in solo terminology, the marginal cost is the final expense of generating another unit of output. Total Cost is specified as the economic cost incurred by all of...

References: Pietersz, G. (2005, October 1). Marginal Revenue. MoneyTerms. Retrieved June 11, 2010, from http://moneyterms.co.uk/marginal-revenue/

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