Marginal Cost (MC) The marginal cost is the rate of change of total cost with respect to the change in the quantity of a good or service produced. It tells...
Marginal Cost (MC)
The marginal cost is the rate of change of total cost with respect to the change in the quantity of a good or service produced. It tells us how much the cost of producing one additional unit changes as the quantity of the good or service increases.
Marginal Revenue (MR)
The marginal revenue is the rate of change of total revenue with respect to the change in the quantity of a good or service produced. It tells us how much the total revenue changes as the quantity of the good or service increases.
Marginal Cost and Revenue in Relation
The marginal cost and marginal revenue are related because they are both measures of how much revenue a firm receives for each unit of output produced. The marginal cost is the rate of change of total cost, while the marginal revenue is the rate of change of total revenue.
Example
Suppose a firm is producing a good for $10 per unit and the total cost function is:
Then the marginal cost is:
And the marginal revenue is:
Therefore, the marginal cost is twice the marginal revenue.
Applications of Marginal Cost and Revenue
Understanding the relationship between marginal cost and marginal revenue helps firms make decisions about pricing, production, and marketing.
Marginal cost can be used to determine the optimal production level, while marginal revenue can be used to determine the optimal price to charge.
Marginal cost and revenue are also used in other business calculations, such as profit margin analysis and break-even point calculations