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Marginal Analysis

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Marginal Analysis

In economics, there are three important terms, marginal revenue (MR), marginal cost (MC) and profit (P). Marginal revenue is defined as a change in total revenue that comes from selling one more unit of output. However, when applied to a pure monopoly, marginal revenue is less than the price of all levels of output except the first level. Marginal cost is the additional cost of making one more unit of output. It can be determined by noting the change in total cost which the unit’s production entails. Profit can be divided into two separate terms, normal profit and economic profit (McConnell & Brue, 2008).
In the definition for marginal revenue the term total revenue is mentioned. When a company is thinking about changing a products output or quantity (Q), it must think about how the total revenue will change. Total revenue (TR) is the total amount received from the sale of a given amount of output. It can be determined by multiplying the price by the corresponding quantity a company can sell. This brings us back to marginal revenue. Marginal revenue is determined by the change in total revenue divided by the change in quantity (McConnell & Brue, 2008).
The formula for this is: MR=ΔTR/ΔQ
Within the definition for marginal cost, the term total cost is given. Total cost (TC) is found by adding total fixed cost (TFC) and total variable cost (TVC) together. The formula for this is: TC=TFC+TVC.
Once total cost has been determined then marginal cost can be determined. In order to figure out marginal cost the formula MC= MR=ΔTC/ΔQ must be used. This equation means that in order to find the marginal cost you must first take the change in total cost and divide it by the change in quantity. (McConnell & Brue, 2008)
When talking about profit, first you must know which term you are referring to. Normal profit can be defined simply as the

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