7.5: marginal cost & marginal revenue

• Marginal Cost (MC): The increase in total cost when one more unit of output is produced. It reflects the additional cost to the firm for making an extra unit.
• Marginal Revenue (MR): The increase in total revenue when one more unit of output is sold. It shows how much revenue the firm earns from selling one additional unit.
• Profit Maximization Rule:

  • To maximize profits, firms should continue producing as long as Marginal Revenue (MR) > Marginal Cost (MC).
  • Once MR = MC, the firm should stop increasing output because this is the profit-maximizing point. Beyond this point, producing more will reduce profit because the cost of producing an additional unit will exceed the revenue generated from selling that unit.
• Total cost = fixed cost + (variable cost per unit x quantity of output)
• Total Revenue (TR): The total income from selling the output at the current price.
• Marginal Cost (MC): Found by calculating the difference in total cost between two output levels
• Total Cost (TC): The overall cost of producing a given level of output. It's calculated by adding fixed and variable costs at each level of production.
• Marginal Revenue (MR): The change in total revenue when the output is increased by one unit.
• total revenue = number of units sold x cost per unit
• Total cost= total fixed costs + total variable costs
• Marginal cost is the change in total costs resulting from increasing output by one unit. Marginal costs relate to variable costs only.
• MC = ∆ TC / ∆ output
• Marginal revenue is the additional revenue gained from selling one extra unit in a period of time
• Marginal revenue = change in total revenue / change in quantity supplied
• Marginal Cost Curve:

  • The MC curve typically slopes downward at first, indicating that initial production costs decrease as firms achieve economies of scale (more efficient production methods).
  • It then slopes upward after a certain point due to increasing marginal costs (diseconomies of scale), where it becomes more costly to produce additional units as the firm reaches its production capacity
• Marginal Revenue Curve:

  • The MR curve is downward sloping, reflecting the fact that as more units are sold, the firm must lower the price to sell additional units (due to the law of demand).
  • This curve shows that revenue increases by a smaller amount with each extra unit sold.
• Optimal Output Choice (Combining MR and MC):

  • The firm should continue increasing production until MR = MC. This is the profit-maximizing output level.
• low-cost airlines (e.g., Ryanair) explains how firms try to minimize marginal costs through various methods, such as:

  • Flying to smaller airports to reduce infrastructure fees.
  • Maximizing fuel efficiency and passenger capacity.
  • Using online sales to cut distribution costs.
• What is Marginal Cost (MC)?

  The rise in total cost when output increases by one unit.
• What is Marginal Revenue (MR)?

  The rise in total revenue when output increases by one unit.
• At what point should a firm stop increasing output to maximize profits?

  When MR = MC.
• Why does the Marginal Cost (MC) curve slope downward initially and then upward?

  Initially, production becomes more efficient as output increases (economies of scale), but beyond a certain point, additional output becomes more costly (diseconomies of scale).
• What happens to a firm's profit if it produces beyond the point where MR = MC?

  The firm’s profit decreases because the cost of producing an extra unit exceeds the revenue generated from selling it.
• MR, MC, and Output Choice:

  • The goal of combining Marginal Cost (MC) and Marginal Revenue (MR) is to determine the profit-maximizing output for a firm.
  • The decision rule for firms is straightforward:
  • If MR > MC: The firm should increase output, as producing an additional unit adds more to revenue than to costs.
  • If MR < MC: The firm should decrease output, as producing additional units will reduce profit.
  • If MR = MC: This is the optimal point, where profit is maximized.