Economics task 1

Topics: Profit maximization, Marginal cost, Economics Pages: 1 (335 words) Published: February 5, 2014

The relationship between marginal revenue (revenue generated by increasing product sales by 1) and marginal cost (the cost in producing that 1 extra product) is important to a business in terms of profit maximization. A business reaches maximum profit when there is equilibrium between these two numbers. An imbalance on either side will result in a decrease in profit. Profit maximization in terms of total revenue to total cost shows that the maximum profit is achieved when the distance between the total revenue and the total cost is at its greatest. Now when looking at marginal revenue to marginal cost profit maximization is a quite the opposite. When looking at it in these terms you are looking for marginal revenue that is equal to the marginal cost for production to reach maximum profits. If either of these numbers is above or below the other there is a profit loss. When calculating marginal revenue the change in total revenue is divided by the change in the quantity. This formula can be shown as the following ∆TR/∆Q. In the scenario given Company A’s marginal revenue decreases by $10 for each additional unit produced. When calculating the marginal cost the change in the total cost is divided by the change in the quantity. This formula can be shown as the following ∆TC/∆Q. In the given scenario for Company A, the marginal cost rose steadily with each increase in quantity production. For Company A, profit maximization is reached at the production of 7 or 8 units. This is the point in which the total revenue and the total cost are the farthest distance from each other resulting in the most profitable quantity for the company. After 8 units the company profits begin to drop. If marginal revenue is greater than marginal cost then to maximize profits the company should increase their outputs. On the other hand if the marginal cost is greater than that of the marginal revenue a decrease in output is required for the company to continue maximizing their...
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