Accounting Economics
Marginal Analysis
Define marginal revenue.
Explain its relationship with total revenue.
Marginal Revenue (MR) is the revenue that is linked to one more additional unit of production. The demand for the product will determine whether it will be higher or lower or even the same as the previous unit of production revenue. MR can be defined therefore as the addition realized revenue to the Total Revenue (TR) by a unit increment in the sales volume of a firm in the market (Economics Concepts, 2011).
For instance if a lime factory sells 100 liters of lime at $4 per liter, the total revenue of the factory would be $400. Incase the factory increases the sales volume from 100 liters to 101 liters, then the total revenue of the factory increases to $404. The increase by $4 in the total revenue by one unit increase in rate of sales per period of time is the MR.
Formula; MR = ?TR
Q
Where
MR is Marginal Revenue
TR is Total Revenue
Q is quantity
B. Define marginal cost.
1. Explain its relationship with total cost.
Marginal cost is the cost that a manufacturer incurs in producing one extra unit of an item. It is the cost of the additional inputs that are required to produce the output. It can also be referred to as the derivative of total production costs with respect to the output levels (Econ Model, 2011). As the production increases, the average total cost curve will decline as the fixed costs will be spread across the large number of goods being produced. This will however change according to the law of diminishing returns and the curve of the average total cost will start climbing.
The total cost can be found by combining variable cost and fixed cost combined
TC = VC+FC
When the total cost is divided by the quantity of goods produced then we get the average total cost.
ATC = TC/Q
Therefore the marginal cost will be the result of the change in total cost divided by the change in quantity
MC=?TC
Q
The total cost and the marginal costs are related in that if the total cost curve has a positive slope (upward sloping), then the marginal cost is also positive. More so, if the total cost curve has a positive slope that becomes increasingly steeper, then the marginal cost is positive and rising.
C. Define profit.
1. Explain the concept of profit maximization.
Profit can be defined as the sum total of the amount remaining after the costs whether they are direct or indirect costs, have been deducted from the income of a particular business venture. It can be in a summery said to be the excess of selling good's price over their cost (Merriam Webster, 2011).
Profit maximization can be found by equating marginal revenue with the marginal costs. Regardless of the market structure, the fact that marginal revenue equals marginal cost is normally used to indicate the profit maximizing levels of output of businesses (John Wiley, 2011). This process that businesses undergo to determine the bets price levels and best output is what is referred to as price maximization. The firms will more often than not adjust influential factors like sale prices, production costs and output levels in a bid to maximize the profits as projected. Most companies use either Marginal Cost-Marginal revenue method or Total cost-Total revenue methods to achieve their profit maximization. Profit maximization can be a good thing for the business or company but can turn out to be a bad idea to the customers when the company starts to use substandard items for the sake of profit maximization, or even decides to raise prices altogether.
D. Explain how a profit-maximizing firm determines its optimal level of output, using marginal revenue and marginal cost as criteria.
The optimal level of output is realized by a firm when they achieve the highest possible profit levels in that firm. The marginal revenue vs. The marginal cost is one of the prominent ways to determine the levels of profit maximization. The maximum profits can be said to have been realized when the marginal cost is equal to the marginal revenue. This is where the two intersect in the graph and optimal levels of production are assumed to have been obtained. At this level any increase in the production of the goods will lead to additional costs than revenue hence reduce the profits and on the other hand, any decrease in production will subtract more from the revenue of the firm than reduce the cost leading to a consequent decline in profits (Amos Web, 2011).
The profit maximization can also be determined by using the Marginal Cost Marginal Revenue method. In this...
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