Economics

Economics

Part One

Marginal Revenue

Marginal revenue is a common term in microeconomics. It is defined as the additional amount of revenue that is generated by a company when the sales of one of its products rise by a single unit. It is also defined as the unit income or revenue that was generated for the company by the last item sold (2000).

Marginal revenue is the ratio of the changes in revenue for the changes in the quantity sold. The revenue function is given as,

R(q) = P(q) . (q)

The marginal revenue is given as

R' (q) = P(q) + P'(q) . q

When a firm is in perfect competition, price is not affected by the quantity of units that are sold. In a perfect competition, therefore, the price and marginal revenue are equal (2000). For a firm doing its business as a monopoly, the prices tend to fall with the increase in the number of units sold. Therefore, in case of a monopoly, the marginal revenue is always less than the price of the product which is sold.

Relationship of Marginal Revenue and Total Revenue

Total revenue and the marginal revenue and have a direct relation between them. When the marginal revenue increases, the total revenue of the firm also increases. It is the change that occurs in the total revenue with reference to the variable (mostly quantity) which is changing (2000).

MR = d(TR)/dQ, where Q is quantity.

B. Marginal Cost

It is the change in the cost of a product when the production of the product changes by one unit. In simpler terms, it is the change in the cost when the quantity produced changes by a single unit. It is also called as that is associated with the production of an additional unit of product (2000). Marginal cost is the cost of the additional unit that is produced by the firm.

Relationship between Marginal Cost and Total Cost

The marginal cost will be positive if there is a positive slope of the total cost curve. The marginal cost is also rising and positive when the slope of the total cost curve is increasingly steeper and positive. The slope of the total cost curve is the marginal cost (2000).

C. Profit

Profit is defined as a benefit in the financial sense, which is gained when the revenues which are gained from an activity become greater than the costs, taxes and expenses needed to keep the activity in rolling condition. All the profit earned goes to the owners of the business (2000).

Profit = Total Revenues - Total Expenses

Profit Maximization

Profit maximization, in economics, is the long run or a short run process which is associated with deciding the optimum level of output and price which yields the greatest return for the firm. The followers of the perspective of total revenue- total cost rely on the fact that the revenue minus the cost is equal to the profit. They tend to follow this and work on maximizing their revenues and cutting their costs. On the other hand, there is ...