...Marginal revenue is the amount added to total revenue by the sale of one more unit, which is equal to the change in total revenue divided by the change in quantity of the units sold. In a purely competitive market marginal revenue is equal to the price of the unit sold. In a pure monopoly marginal cost is always less than the price of the unit. Marginal cost is the additional cost of production of one extra unit. It is equal to the change in total cost divided by the change in output. In the short run, marginal cost is equal to the change in total variable cost divided by the change in output. Profit is the return on entrepreneurial ability; total revenue minus total cost. Profit, in this sense takes into account all the costs of business operation and the wage of the owner or entrepreneur, a wage that needs to exceed the entrepreneur’s ability to just go off and start another business instead of focusing on this one. Anything over the entrepreneur’s wage and the total cost would be considered profit. Profit maximization is the point at which the marginal revenue of each resource is equal to its marginal cost. This is the quantity of each resource that must be employed to maximize profit or minimize loss. A profit maximizing company would use the marginal revenue minus the marginal cost rule to find the point of profit maximization. When output is relatively low the marginal revenue will usually exceed the marginal cost. At high output levels, however, the marginal cost...
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...One of the most important objectives of any business is profit maximization. The concept aids in the survival of the business, guarantees an increase in the return of its shareholders, and also prevents insolvency from occurring. In order for a business to understand profit maximization it must first comprehend the relationship between marginal revenue and cost. For a company to properly understand marginal revenue and cost, it would have to determine how it is related to total revenue (TR) and total cost (TC). The TR is the total amount of money that a firm gets from, selling their products; the calculation to determine total revenue is TR=price X quantity. Total revenue is not considered profit though. Profit is actually total revenue minus total cost (profit=TR-TC). According to the scenario of the chart below, Company A increases production and sales from 7 units to 8 units, the total revenue shows no increase. Total Revenue to Total Cost is cost, therefore following the scenario, the profit maximization occurred when 8 units were produced. The total revenue for the production of 8 units was $920.00, the total cost of producing those units was $380.00. If Company A continued increasing their level of output, ultimately costs would increase as well. Instead of looking for the largest difference between revenue and cost, now the purpose is to find when these two aspects of marginal analysis are equal. Marginal revenue to Marginal Cost is equal; MR=MC. Marginal revenue...
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