The Definition of Marginal Revenue

In economics and finance, businesses often need to use a number of measurements to calculate revenue and costs so that they can create strategies for maximizing profits. As supply and demand levels fluctuate, so too do revenues and expenses. Businesses should recalculate their marginal revenue and cost amounts on a regular basis to keep sales and growth at a steady level.

A. The Definition of marginal revenue:

Marginal revenue is the added revenue that one extra product unit generates for a business. It is represented by the additional income collected from selling one more unit. Marginal revenue can also be thought of as the change in the total revenue divided by the change in the number of units sold. To calculate marginal revenue, you need to divide the total revenue by the quantity of units sold. For example, it the total revenue for a business was $10,000 for 2,000 units sold, and then the marginal revenue amount would be $5 ($10,000 / 5 units).

1. Explain its relationship with total revenue.

B. The Definition of marginal cost:

Marginal cost is the change in total cost which occurs when the number of units produced change by just one unit. In other words, marginal revenue is the cost of producing one additional unit of a particular good. Marginal revenue is calculated by dividing the total variable cost of production by the total quantity of goods (MC = VC / Q). For example, if the variable cost of producing 5 widgets is $40, then the marginal cost for producing one more unit would be $8 ($40 / 5 units).

1. Explain its relationship with total cost.

C. Define profit.

1. Explain the concept of profit maximization.

D. Explain how a profit-maximizing firm determines its optimal level of output, using marginal revenue and marginal cost as criteria.

E. Explain what action a profit-maximizing firm takes if marginal revenue is greater than marginal cost.

F. Explain what action a profit-maximizing firm takes