...SUBDOMAIN: 309.1 – ECONOMICS Competency 309.1.1: Marginal Analysis - The graduate correctly applies marginal analysis. Objective 309.1.1.05: Describe the relationship between marginal revenue and marginal cost at the point of profit maximization. Objective 309.1.1.06: Explain the concept of profit maximization. Introduction: Business owners, managers, and aspiring entrepreneurs need to know the best form of business organization to select based on various considerations, including taxes, liability, capital contributions, sharing of profits and losses, management and control, and survivorship. Task: Write an essay (suggested length of 1–3 pages) that explains the relationship between marginal revenue and marginal cost, and the importance of these concepts for profit maximization in which you do the following: A. Define marginal revenue. Marginal Revenue is the change in revenue that results from the sale of one additional unit of output. (McConnell & Brue & Flynn 2012) Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity. 1. Explain its relationship with total revenue. Total revenue is all money/income that a business makes over a period of time from the sale of goods or services. It is calculated by multiplying quantity sold by price. If you know marginal revenue you will be able to tell what total revenues will do if business sales change. If marginal revenue is greater than zero, selling another unit...
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...Task 1 Marginal Analysis Student Name Western Governors University Student ID: The primary focus of this paper is to demonstrate the concepts of marginal revenue and marginal cost, how the two are related to each other and how they are used by a company in profit maximization. By factoring, analyzing and comparing the various data on revenue and cost, a company can use a marginal analysis to determine the best direction to maximize profits. A marginal analysis is the “comparisons of marginal benefits and marginal costs, usually for decision making” (McConnell, 2011, p. 6). A. There are two methods to describe profit maximization. Further details of both methods and how each are used to determine profit maximization are as followed: 1. One method of understanding profit maximization is by using the relationship of total revenue and total cost. Total revenue is the total income that a company receives from a product or service. The price multiplied by the quantity of the product or service equates to the total revenue. Total cost is the total expense or cost to a company to produce a product or provide a service. Profit is determined by subtracting the total cost from the total revenue. Initially, as production or quantity increases, profit increases as well. There is a point, however, where the profit will maximize and then begin to diminish as the unit quantity increases. This point is where the greatest profit is realized in relation to the total revenue and total...
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... 2. What are the major barriers to entry that explain the existence of monopoly? 3. What is the relationship between economies of scale and a natural monopoly? 4. Some economists argue that pure monopolists will purposely avoid the price-output combination that will maximize their profits. Explain how this less-than-maximum profit behavior could be rational. 5. In what ways, if any, do the demand schedules for a purely competitive firm and a pure monopolist differ? What significance does this have for the price-output behavior of each? 6. Why is marginal revenue less than price for every level of output except the first? 7. How does price elasticity affect the price-quantity combination and segment of the demand curve that the monopolist would prefer for price and output? 8. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00, average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist do to maximize profits? 9. A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output, the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The marginal revenue is $3.00. What is the short-run condition for the monopolist and what output changes would you recommend? ...
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...EGT1 – TASK GUIDE INTRODUCTION: As you work on each of the Tasks please make use of the various resources posted and updated within the Business Undergraduate Economics Learning Community Task 1 Recorded Webinar TASK 1: MARGINAL ANALYSIS This Task centers on the competency of marginal analysis with two structured objectives. First is the requirement to describe the relationship between marginal revenue (MR) and marginal cost (MC) at the point of profit maximization. Second is the requirement to explain the concept of profit maximization. ACTIONS OF APPROACH: 1- Prior to turning in the Task, consider attending a Live Webinar on the Task. Students that attend are much more likely to pass the Task. You can always find an updated schedule of Live Webinars in the Community Pages (link at the top of this document). 2- This essay should be relatively short (1-3 pages) and can be written entirely from the concepts discussed within the McConnell e-text. In preparing for this Task you should read Chapters 7-11 of the McConnell e-text, with specific concentration on the information in Chapters 7 & 8. *Chapter 7 "Business and the Costs of Production" *Chapter 8 "Pure Competition in the Short Run" Chapter 9 "Pure Competition in the Long Run" Chapter 10 "Pure Monopoly" Chapter 11 "Monopolistic Competition and Oligopoly" 3- Formulate your responses to this Task in accordance with an “outline” format. More specifically, when writing your paper – list the Task Element and structure your...
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...be described as total revenue (TR) vs. total cost (TC). Total revenue is quantified as a firm’s total profit intake from sales of a product or service delivered. This is total amount of revenue that was derived from consumer spending. Total cost, however, includes all the purchases of raw materials, labor, production, transportation, distribution or any other cost incurred by this particular firm for this particular product or service. In order to calculate profitization, you must subtract the total cost from the total revenue. The point at which maximum profitization would occur would be when the difference between these two numbers is at it’s positive peak. To define marginal revenue (MR), we must first define marginal cost. Marginal cost (MC) is that additional cost associated with producing this additional product or service to the consumers. It can be calculated by dividing the change in cost by the change in unit production. After calculating marginal cost, if the cost is lower than the current price of the item, there is no need to lower the price of the item to sell more units. In the given illustration, Company A spends $30 to produce one product and $50 to produce two. The marginal cost, in this example, would be $20. It also illustrates that this cost increases $10 for every new product. Marginal revenue is defined as the additional profit or revenue that a firm can produce by offering more products or services. Marginal revenue can be calculated by...
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...Applications Marginal Analysis By Christine Poole April 12, 2013 Abstract This essay will define marginal revenue, marginal cost, and profit, and it will explain the relationship each has with total revenue, total cost, and it will explain the concept of profit maximization. Marginal Revenue Marginal revenue is “The change in total revenue that results from the sale of 1 additional unit of a firm’s product; equal to the change in total revenue divided by the change in the quantity of the product sold.”(McConnell, C. R., & Brue, S. L., Flynn, S. (2012)). Total revenue is the total receipts of a firm from the sales of any given quantity of a product. It can be calculated as the selling price of the firm’s product times the number of items sold. If the total revenue is zero when zero units are sold, then the first unit of output sold increases total revenue by the selling amount, which is also the marginal revenue amount. The demand for the product will determine whether the marginal revenue is higher, lower or the same as the revenue from the previous unit produced. “While marginal revenue can remain constant over a certain level of output, it follows the law of diminishing returns and will eventually slow down, as the output level increases.” www.investopedia.com/terms/m/marginal-revenue-mr.asp. When marginal revenue equals marginal cost competitive firms will stop producing output. Marginal Cost Marginal cost is the change in the total cost that comes...
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...maximization it must first comprehend the relationship between marginal revenue and cost. For a company to properly understand marginal revenue and cost, it would have to determine how it is related to total revenue (TR) and total cost (TC). The TR is the total amount of money that a firm gets from, selling their products; the calculation to determine total revenue is TR=price X quantity. Total revenue is not considered profit though. Profit is actually total revenue minus total cost (profit=TR-TC). According to the scenario of the chart below, Company A increases production and sales from 7 units to 8 units, the total revenue shows no increase. Total Revenue to Total Cost is cost, therefore following the scenario, the profit maximization occurred when 8 units were produced. The total revenue for the production of 8 units was $920.00, the total cost of producing those units was $380.00. If Company A continued increasing their level of output, ultimately costs would increase as well. Instead of looking for the largest difference between revenue and cost, now the purpose is to find when these two aspects of marginal analysis are equal. Marginal revenue to Marginal Cost is equal; MR=MC. Marginal revenue is the change in extra funds from increasing quantity of widgets by one unit, which can be determined by the difference in the total revenue by dividing it by the change in quantities of widgets (MR = ΔTR (difference of two revenues at the same output level)/Δq (will always...
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...| | | | In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, revenue is referred to as turnover. Some companies receive revenue from interest, royalties, or other fees.[1] Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $42 million." Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.[2] The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. Revenue is also known as "REVs." Marginal revenue From Wikipedia, the free encyclopedia Jump to: navigation, search Typical marginal revenue R' and average revenue (price) <R> curves for a firm that is not in perfect competition In microeconomics, marginal revenue (R') is the additional revenue that will be generated by increasing...
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...purpose of turning inputs into outputs • Different individuals will provide different types of inputs – the nature of the contractual relationship between the providers of inputs to a firm may be quite complicated 2 Contractual Relationships • Some contracts between providers of inputs may be explicit – may specify hours, work details, or compensation • Other arrangements will be more implicit in nature – decision-making authority or sharing of tasks 3 Modeling Firms’ Behavior • Most economists treat the firm as a single decision-making unit – the decisions are made by a single dictatorial manager who rationally pursues some goal • usually profit-maximization 4 Profit Maximization • A profit-maximizing firm chooses both its inputs and its outputs with the sole goal of achieving maximum economic profits – seeks to maximize the difference between total revenue and total economic costs 5 Profit Maximization • If firms are strictly profit maximizers, they will make decisions in a “marginal” way – examine the marginal profit obtainable from producing one more unit of hiring one additional laborer 6 Output Choice • Total revenue for a firm is given by R(q) = p(q)q • In the production of q, certain economic costs are incurred [C(q)] • Economic profits () are the difference between total revenue and total costs (q) = R(q) – C(q) = p(q)q –C(q) 7 Output Choice • The necessary condition for choosing the level of q that maximizes profits...
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...MARGINAL COSTING Introduction This paper explores the use of cost accounting information for decision-making purposes. DEFINITION OF KEY TERMS Marginal cost: This is the cost of a unit of a product or service, which would be avoided if that unit or service was not produced or provided Break-even point: This is the volume of sales where there is neither profit nor loss. 1 9 6 COST ACCOUNTING S T U D Y T E X T Margin of safety: This is the excess of sales over the break-even volume in sales. It states the extent to which sales can drop before losses begin to be incurred in a firm Contribution: This is the difference between sales value and the marginal cost of sales. To understand this topic, you need to understand the topic on cost behavior first. Marginal costing is built on cost behavior and terms. Of key importance are product costs, period costs, variable costs and fixed cost. Product costs are costs identified with goods produced or purchased for resale. Such costs are initially identified as part of the value of stock and only become expenses when the stock is sold. In contrast, period costs are costs that are deducted as expenses during the current period without ever being included in the value of stock held. We saw how product costs are absorbed into the cost of units of output. Now we describe marginal costing and compare it with absorption costing. Whereas absorption costing recognizes fixed costs (usually fixed production costs) as part of the...
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...Production and Cost Analysis Rasheeda Arthur, Sarah Fischer, Tera Ginnaty, Mike May, Shannon McMillan, Tiffany Sawyer, Tiffany Weiland ECO/365 Version 4 September 16, 2013 John Ilokwu Production and Cost Analysis Colander (2010) explains analyzing production and cost, and provides insight into how the abilities of market economies effect the organization of a society. In week two, Team C learned evaluating production and cost within a firm is a complex study involving several key focus points. The team learned it is essential to understand the relationship between inputs and the law of diminishing marginal productivity. Another key point discussed in week two focused on the relationship between production and productivity inside a firm. It is also significant to note the price of inputs has a large effect on the supply curve. In addition, it is important to recognize marginal revenue and costs directly tie to output volumes. Through research, teammates determined each focus point provides insight into a firm’s operations as it relates to production and cost (Colander, 2010). The Law of Diminishing Marginal Productivity The law of diminishing marginal productivity recognizes a company cannot change inputs at the same time or to change the quantity of inputs. Rather, changing the level of one or more inputs while leaving the others static is a more realistic process of adjusting productivity. However, recognizing this process...
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...economics, marginal revenue is the revenue that an additionally produced unit will create, if sold. When a company is in a competitive market, the price of the unit sold does not change, so marginal revenue is the price of a single unit. The relationship between marginal revenue and total revenue is calculated when marginal revenue is equal to the change in total revenue divided by the change in quantity, when the change in quantity is equal to a single unit. Mathematically marginal revenue is calculated using the product rule formula of MR = d(TR)/dQ where MR equals marginal revenue, TR equals total Revenue, and Q equals quantity On the contrary, marginal cost is the cost incurred to create one additional unit. This would include for example the cost of additional equipment if it was needed to produce the additional unit. Marginal cost relates to total cost in that marginal cost is the change in total cost that comes when the number of units produced is increased by one. Total cost is found when adding fixed costs plus variable costs and multiplying by the amount of units produced. Marginal Cost is found by using the calculus formula of MC = dTC/dQ, where MC is equal to marginal cost, TC is equal to total cost, and Q is equal to quantity. Marginal cost is also the slope of the total cost curve when cost and quantity are represented on a graph. Profit is the amount of money a company makes when the total cost of production is subtracted from total revenue. If the number...
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...somewhat overwhelming at first, but by applying the principals of total revenue, total cost, marginal revenue, and marginal costs the process of determining profitability is simplified greatly. In order to understand how the principles of economics affect the profitability of a company it is important to understand what each principal is. The first principle, total revenue can be summarized as, the price of a unit sold multiplied by the number of units sold. For example if the price per unit sold is $10 and the firm sells 10 units, the total revenue is $100. The next principle, total cost, is defined by McConnell, Brue, and Flynn (2012) as, “the sum of fixed costs and variable costs” (p. 35). Fixed costs are items that do not change when output is changed and can include items such as real estate, utilities, loan payments, and government fees. Variable costs on the other hand are the opposite of fixed cost and include the costs associated with an increase in output (McConnell, Brue, Flynn, 2012, p. 148). Examples of variable costs could include items such as materials, production supplies, and direct labor. Using total revenue to total cost profitability can be calculated by subtracting the total costs from the total revenue. In the case of Company A the total revenue to total cost would look like table 1 below. Table 1 Company A Total Revenue to Total Cost Units TR TC Total Revenue to Total Cost 0 $0.00 $10.00 -$10.00 1 $150.00 $30.00...
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...Regression Case Executive Summary The Cobb-Douglas cost function of Cranston Coils was found using output, capital, and labor data from their eighteen plants. The cost function, Q = (0.40692) K0.32477 L0.79466, was used to determine the short-run cost equations of total cost, average cost, average variable cost and marginal cost. Calculations using these equations gave rise to Cranston Coils cost structure, which predicts cash flow within the company. Cranston Coils’ cost function was also used to determine if a contract between Sleep Easy and Cranston Coils should be accepted. After determining marginal cost and revenue (see Appendix 5: Sleep Easy Contract Costs at Connecticut Plant), the contract should be accepted. Problem Definition The short-run cost structure of the new Cranston Coils facility in Connecticut needs to be determined in order to predict the cash flow of the new plant. Once the cost structure is defined, the cost function can be used to evaluate whether or not certain contracts should be accepted, such as the Sleep Easy Company’s proposed contract of fifty units at $70.00 per unit. Identification of Possible Solutions The short-run cost equations of Cranston Coils indicate that the cost structure varies between the plants because of the significant discrepancy between the marginal costs of each plant. One possible solution would be to reevaluate each plant’s marginal product of labor and marginal product of capital in order to determine where the...
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...A. When subtracted, total revenue and total cost provide the amount of profit for a given quantity of widgets produced. Once all profit values are determined via the TR – TC = P calculation for each increment of production, the point at which profit maximization occurs can be concluded. The largest gap between total revenue and total cost indicates the point at which profit maximization is achieved. (See Table 1) When using the marginal revenue to marginal cost approach, the ideal situation to have is when marginal revenue equals marginal cost. This is the point when the highest possible profit is being achieved. The logic behind this is that if the revenue of producing more widgets is less than the cost of producing the widgets, there is a profit to be made. If the cost of producing the widgets exceeds that of the revenue brought to the company by the selling of the widgets, then the company is losing money. Once the output quantity is established that provides the company with equal values for marginal revenue and marginal cost, the number of widgets can be adjusted accordingly. This will provide the company with a more financially successful situation. (See Table 1) B. Marginal revenue is defined as the additional revenue that is generated by increasing sales by one unit. The calculation used to determine marginal revenue is the change in total revenue divided by the change in quantity. (MR= TR/ Q) The marginal revenue in the given example decreases by $10 for each additional...
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