For any firm conducting operating in a for-profit basis, marginal revenue is defined as the amount of additional revenue that producing one additional unit will contribute towards its total revenue. (Investopedia). Simply stated if a company decides to produce an additional unit of product Y, the total sales for product Y will increase in the amount that marginal revenue dictates. On the other side of the revenue/cost equation, there are total costs as well as marginal costs. The marginal cost for producing an additional unit of output entails the necessary inputs in materials and resources in order to manufacture an additional unit of production.
(Investopedia). The total costs for manufacturing increase in relation to the costs associated to producing an additional unit of production or marginal costs. For any business, profit is defined as the overall financial or economic benefit earned when a certain business activity derives a financial gain. Basically for a firm to earn a financial profit, the revenues arising from performing such an activity exceeds the costs and taxes needed to continue the activity. Most firms strive to operate in an efficient manner, where their limited resources are utilized in the most effective manner possible. Profit maximization refers to maximizing the effectiveness of revenue generating activities to derive the greatest amount of financial benefit.
A business firm looking to maximize their profit levels will produce additional units of output only up to the unit production level where marginal costs equal marginal revenue. This will be the level of production where a profit maximizing firm will achieve the highest total profit margin (Varian). In order for a company to maintain the maximum level of profitability, the firm would analyze whether marginal revenue is greater than marginal costs, if so, the firm will continue to produce additional units up until the point that marginal costs equal marginal revenue.
On the other hand, if marginal revenue is less than marginal costs, the firm has passed the point of maximum profit and has reached diminishing returns. The firm must lower its total production output until the marginal revenue equals the marginal costs in order to reach profit maximizing levels. Work Cited Page Investopedia. com. 2011. “Marginal Revenue (MR). ” 14 December 2011.
Investopedia. com. 2011. “Profit. ” 14 December 2011. Varian, H. Intermediate Microeconomics: A Modern Approach (6th ed. ). New York: W.W. Norton & Company. 2003.