- Pages: 4
- Word count: 842
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A: Marginal revenue is the change made in total revenue a company makes caused by an additional item being produced. This is calculated by figuring the difference between the revenue produced both before and after a single unit increase in the production rate. If the price of a product is constant, the marginal revenue and price are the same. Sometimes an additional item will only sell if the price goes down and that leads to the consideration of marginal cost or the cost of producing one more item. If marginal cost exceeds marginal revenue, further production is not recommended since it would result in a loss. If marginal revenue exceeds marginal cost, then the production of an additional unit would be advised since it would result in an increase in profit. The marginal revenue received by a firm is the change in total revenue divided by the change in quantity, often expressed as this simple equation: marginal revenue| =| change in total revenuechange quantity| [ (Marginal Revenue) ]
B: Marginal cost is the variation in the total cost of production as a result of the production of one more or one less unit. Marginal cost is important in figuring out whether or not to vary the production rate. Typically, marginal cost decreases as the output increases due to factors such as the cost of bulk rate materials, the efficient use of the existing equipment and labor specializations of the employees. A sale at a price higher than the average marginal cost will result in the company making more profit even though the price doesn’t cover the average total unit cost. Marginal cost can be seen as the lowest amount at which a sale can be made without subtracting from the profits of a company. Marginal Cost = Total Cost divided by Quantity or (Marginal Cost)
C: Profit is the return on investment after the cost of production and all other business charges. For example, if a company spends $80,000 in the production of a product and the total sales of that product come to $130,000, then the company has made $50,000 in profit from that product. To calculate the output at which a company will maximize its profit, the company could create a chart that shows the output, what the cost is per unit of output (fixed cost plus variable cost equals total cost), the revenue that would be made on each unit and calculate the profit or loss from each unit. Total Revenue – Total Cost equals the profit or loss.
D: Profit maximization is the process used to determine the number of items to be produced and the price at which that item needs to be sold to make the most money. There are two main ways of calculating profit maximization. The first is the Total Revenue – Total Cost method. This method relies on the fact that profit (P) = Revenue – Cost. (Profit Maximization) To determine profit maximization using the Total Revenue – Total Cost method, you would start with the understanding that profit is total revenue minus total cost. P=TR-TC. If you know the cost of production of a product at the various output levels, you can find the optimal production level by either creating a chart for it or by plotting it on a graph. To figure out the price at which to sell the item, you would have to know the demand curve. The price when quantity equals the maximum output is the price at which the product needs to be sold.
The second is the Marginal Revenue – Marginal Cost method. This method is based on the concept that profit is at its highest point when marginal revenue and marginal cost are equal. For each item produced, marginal profit should equal marginal revenue minus marginal cost. If the marginal revenue is higher than the marginal cost, then the marginal profit is positive and the opposite means that the marginal profit is negative. Total profit goes up when the marginal profit is positive and goes down when the marginal profit is negative. (Marginal Revenue) E: If marginal revenue is greater than marginal cost, then a company would need to make more of that product until the last items produced make the company break even. A company with marginal revenue greater than marginal cost brings in a great deal of profits.
F: If marginal revenue is less than marginal cost, then the company should find ways to reduce the cost of production such as finding less expensive materials, finding ways of increasing productivity and increasing efficiency. In some cases, a slight increase in the price of that item is required to find equilibrium. A firm may also choose to halt production in the short-run.
Marginal Cost. (n.d.). Retrieved 12 14, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Marginal_cost Marginal Revenue. (n.d.). Retrieved 12 14, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Marginal_revenue Marginal Revenue. (n.d.). Retrieved 12 15, 2011, from AmosWeb Encyclonomic: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=marginal+revenue Profit Maximization. (n.d.). Retrieved December 12, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Profit_maximization