Marginal Analysis

716 WordsMay 13, 20143 Pages
1 Marginal Analysis Melissa Evans Western Governors University EGT1 – Task 1 2 The purpose of this paper is to describe the relationship between marginal revenue and marginal cost at the point of profit maximization. Marginal revenue is the extra revenue gained from selling an additional unit of output, marginal revenue and price are equal. Total revenue increases by the marginal revenue price of the product each time an additional unit is sold. For example, if the price of a product is $100, the first unit of output sold will increase total revenue from zero to $131, marginal revenue for that unit is $100. The second unit sold increases total revenue from $100 to $200, marginal revenue is $100 again. (McConnell, Brue, Flynn, 2012, pg.166) Marginal cost is the cost that is incurred from producing one more unit of output. Total cost is the total of fixed cost and variable cost at each stage of producing one more unit of output. Fixed costs are often referred to as overhead costs and include expenses such as employee salaries, insurance premiums and monthly rents. Variable costs change based on the output activity of the business and include materials, fuel for transportation and labor. Marginal cost is the rate at which total cost changes due to the amount of additional units being produced. Profit is the income left after operational costs and overhead costs are paid. Profit maximization is a process within a firm that tells the firm the price and output levels that provide the most profit. Firms within a purely competitive market firm cannot attempt to increase their profit maximization by increasing or decreasing product prices because price is set by supply and demand within the market. Firms then can only choose to adjust output through changes in variable costs such as material and labor. There are two approaches to determine the level of output firms

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