What is meant by marginal cost and marginal revenue?

Answer 1

Marginal cost is the cost to a firm of producing one extra unit of product. For example, if total output is 100 units and total cost is $500, but if output is raised to 101 units, total cost will rise to $504, this means that the marginal cost of the 101st unit is $4.

Marginal revenue is the income received by a seller from selling one extra unit. For example, if total units sold are 100 units and total revenue is $1000, and if units sold become 101 units, total revenue becomes $1009, then the marginal revenue of the 101st unit is $9.

A firm achieves its maximum possible total profit when MR = MC (ie: when marginal profit = 0, which means that producing and selling one extra unit will cost $x and will yield revenue of $x too). Before the point where MR = MC, total profit is rising. After that point, total profit is declining (but there are not necessarily losses).

When making decisions regarding production increases or decreases, a firm should base its thinking on marginal costs and revenues rather than on total or average ones because it is the "marginal" side of the picture that will change when output is changed.

Did this help you? I hope so.