Marginal Revenue and Marginal Cost

Topics: Marginal cost, Profit maximization, Microeconomics Pages: 2 (660 words) Published: April 28, 2013
Marginal Revenue and Marginal Cost
An understanding of marginal revenue and marginal cost is economically crucial to owning and operating a successful business. Marginal revenue is the amount of change in total revenue by selling one additional product. So if a company sells four extra unit of product and brings extra total revenue of 500 dollars than the marginal revenue for this month would be 125 dollars. This is found by taking the change in total revenue, 500 dollars, and dividing it by the change in quantity, 4 units of product. This gives you the marginal revenue which can help a company understand what each unit is worth and how much they will be making for each extra unit. Marginal cost is how much it cost the company to produce one more product. A company calculates the marginal cost by taking the change in total cost and dividing it by the change in quantity. If it cost a company 400 dollars to produce eight units and it cost a company 425 dollars to produce nine units than the marginal cost for making product nine is 25 dollars. Finding a profit and understanding when you are earning a profit is crucial because this defines how much your company with gross every month. To find the profit you take the total revenue and subtract the total cost. This number equals your profit and can help a company maximize its earning potential. Every company wants to make sure that it maximizes its profit. With profit-maximization in relation to marginal differences you are able focus on each individual product and what it will return in profit. When looking at the marginal revenue a company wants to find at what quantity is revenue the greatest. It will also need to compare that to each number of quantity what the marginal cost is. To maximize profit a company wants to find the point where it has the Marginal Revenue and Marginal Cost equal each other. It is very good for a profit maximizing company to have its marginal revenue greater than marginal cost. When...
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