Marginal Revenue and Marginal Cost

Marginal Revenue and Marginal Cost
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Marginal revenue is a vital concept in macroeconomics. It is extra revenue as a result of sale of an additional unit of a certain product to in a firm. Marginal revenue can be calculated through dividing change in total revenue by the change in quantity of the output. Although marginal revenue remains constant over a given quantity of output, it usually follows diminishing returns law and eventually diminishes as the level of output increases (Jacques, 2003).
MR=d (TR)/dQ, where Q is quantity.
There is a direct relationship between marginal revenue and the total revenue where total revenue increases with the increase in marginal revenue.
It can also be defined as change in total revenue divided by change in number of sold units. This can be shown as; MR=d/ d (Q) (TR).Therefore, a conclusion can be reached that,
MR d (Q) =TR
Marginal cost can be defined as a change in the total cost as a result of change in cost of one unit of a product in a firm. Marginal cost is cost of producing one more unit of a product. It is the derivative of entire production costs of the firm with respect to output level.
There is a relationship between total cost and marginal cost in the terms of production costs for service providers or manufacturing companies. Total costs comprise marginal costs since when determining the total costs both marginal costs and fixed costs are used. Therefore there is a direct relationship between the marginal costs and the total costs thus as marginal costs increases the total costs increases as well.
Profit is the variation between the sales revenue of certain products in a firm and the total costs incurred in the production of these products plus all other expenses. Profit can also be defined as total revenue minus total costs. It can be calculated as,
Profit=TR-TC
Profit maximization is the long and short run process that various firms uses to determine the output and the price level combination that will bring the highest returns to a firm. Profit is maximized where marginal costs are equals to marginal revenue. This is the general used rules by any firm whether a monopoly or perfect competitor in reaching on the profit maximization decision (Jacques, 2003).
A profit maximizing firm uses marginal revenue and marginal cost to ensure that it attains maximum profits. There are two conditions that have to be satisfied for a firm to maximize its profits; the necessary condition and the sufficiency condition. The necessary condition requires that optimal output will be that quantity where marginal revenue equals marginal cost, MR = MC. The sufficiency condition requires that marginal profit must be decreasing at the optimal level output. This conditions apply to a firm operating in a perfectly competitive market.
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