Marginal cost and marginal revenue are two important terms in economics. In order to understand the concept of marginal cost and marginal revenue, it is important to first define the term ‘marginal’ in economics. Marginal is simply the change that takes place when one more unit is produced or sold. It becomes important to calculate marginal cost and marginal revenue in order to determine the optimal level of output and pricing for a product or service.
What Is Marginal Cost?
Marginal cost is the cost of producing an additional unit of a product or service. In simpler terms, it is the extra cost incurred to produce or sell one more unit of a product or service. For example, suppose a company produces 100 units of shoes and the total cost incurred is $1,000. The marginal cost of producing 101st unit would be the change in the total cost, which is the cost of producing one unit.
Marginal cost is important for businesses as it helps them in determining the optimal level of production. The aim of any business is to maximize its profit, and this can be achieved by producing at the point where marginal cost is equal to marginal revenue.
What Is Marginal Revenue?
Marginal revenue is the additional revenue earned by selling one more unit of a product or service. It is the change in total revenue that occurs when one more unit is sold. For example, suppose a company sells 100 units of shoes at $20 per unit. The total revenue earned is $2,000. If the company sells 101st unit at $20, the total revenue earned would be $2,020. Therefore, the marginal revenue of the 101st unit would be $20.
Marginal revenue is important for businesses as it helps them in determining the optimal level of pricing. It is the point where the additional revenue earned from selling one more unit is equal to the additional cost incurred in producing that unit.
Difference Between Marginal Cost and Marginal Revenue
Marginal cost and marginal revenue are two important concepts in microeconomics that are used to determine the optimal level of output and pricing for a product or service. The main differences between the two are as follows:
1. Marginal cost is the cost of producing an additional unit, whereas marginal revenue is the revenue earned from selling one more unit.
2. Marginal cost increases as the level of output increases, whereas marginal revenue decreases as the level of output increases.
3. The optimal level of production is achieved when marginal cost is equal to marginal revenue, which is also known as the profit-maximizing level of production.
4. If marginal revenue is greater than marginal cost, the business should produce and sell more units as it can generate more profit. If marginal cost is greater than marginal revenue, the business should produce and sell fewer units as it will result in a loss.
Frequently Asked Questions
Q: What is the relationship between marginal cost and average cost?
A: Marginal cost is the cost of producing one more unit, whereas average cost is the total cost divided by the total number of units produced. When marginal cost is less than average cost, it results in average cost decreasing. When marginal cost is greater than average cost, it results in average cost increasing.
Q: How is marginal cost calculated?
A: Marginal cost is calculated by taking the change in total cost when producing one more unit. Therefore, MC = ∆TC/∆Q
Q: How is marginal revenue calculated?
A: Marginal revenue is calculated by taking the change in total revenue when selling one more unit. Therefore, MR = ∆TR/∆Q
Q: What is the importance of marginal cost and marginal revenue?
A: Marginal cost and marginal revenue are important concepts in economics, as they help businesses in determining the optimal level of production and pricing. The profit-maximizing level of production is achieved when marginal cost is equal to marginal revenue.
Conclusion
In conclusion, marginal cost and marginal revenue are two important concepts in economics. Marginal cost is the cost of producing one more unit, whereas marginal revenue is the revenue earned from selling one more unit. The optimal level of production is achieved when marginal cost is equal to marginal revenue. Businesses should aim to produce and sell at the point where marginal cost is equal to marginal revenue, in order to maximize their profit.