Marginal Analysis

Marginal Analysis

Most firms and business want to find ways of maximizing their profit. These firms want to know what affect adding or taking away a unit will have on the company. When increasing profit and productivity, there is an increase in other variables that require an analysis of production. This analysis will determine at what cost would it make sense to increase productivity; and will that necessarily increase the profits? These are the decisions that firms must make in order to know if it is worth it to maximize their profit or if is feasible continue business as usual.

Marginal Revenue

Relationship of Marginal Revenue and Total Revenue

We start with defining marginal revenue. Marginal revenue is the extra revenue generated by selling one additional unit of a good or service. For example, if a company can sell 10 units of books at a price of $25 per book, total revenue is $250. If, in order to sell 11 books, it must reduce the price to $24, total revenue rises to 11 × $24, or $264. Thus, the marginal revenue of the 11th book is $264 - $250, or $14.

The relationship with total revenue is when companies are considering a change in its output, it will deliberate how total revenue will change as a result. Marginal revenue is the extra revenue that results from selling 1 more unit of output. This is from a pure competition model, which is highly favored and a starting point for any discussion of price and output determinate. This model provides a standard, or normal evaluating the efficiency of the real-world economy. An example of this change can be seen in the model below:

Price Quantity TR MR

200 - $ - 200

200 1 $ 200.00 200

200 2 $ 400.00 200

200 3 $ 600.00 200

200 4 $ 800.00 200

200 5 $ 1,000.00 200

200 6 $ 1,200.00 200

200 7 $ 1,400.00 200

200 8 $ 1,600.00 200

200 9 $ 1,800.00 200

200 10 $ 2,000.00 200

MR/TR 1

As you can see from model MR/TR1, when zero units are sold, total revenue is zero. So, when the first unit of output is sold, this will increase total revenue from zero to $200, the marginal revenue for this unit is $200. When the second unit is sold, total revenue will increase to $400, but marginal revenue will remain the same. In a pure competition, marginal revenue and price are equal.

MR/TR 1a

Here in model MR/TR la, we presentig the pure competitive firm's total demand, total revenue, marginal revenue and average revenue curves. The line that slopes upward and to the right is total revenue (TR). The slope is constant due to each extra unit sold increases TR by $200. The demand curve is horizontal, which indicates a perfect price elasticity. The marginal revenue and the demand curve are the same due to the production price is constant. The average revenue curve equals price and therfore coincides with the demand curve.

Marginal Cost

Relationship of Marginal Cost and Total Cost

Another tool in the decision analysis is marginal cost. Marginal costs are cost a firm can control directly and immediately. MC designates all the cost incurred in producing the last unit of output. Furthermore, MC can designate cost that can be saved by not producing that last unit. In other words, when a firms needs