Assignment on Relationship Between Marginal Revenue and Marginal Cost

Added on - 18 Sep 2019

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Microeconomics
Marginal revenue and marginal cost are critical to deciding price level. Explain-Themeasures of marginal cost of production, as well as the marginal revenue, are used to determinethe level of price that the firm will charge as well as the amount of the output that the firm willbe willing to supply for any given level of prices. This is a general statement that the sole aim ofan organization is to achieve the maximum level of profits. The relationship that exists betweenthe marginal revenue, as well as the marginal cost, are the important determinant that helps tofind the point of profit maximization through the pricing mechanism. In other words, the point atwhich marginal revenue equals marginal cost is the point where the company maximizes itsprofit through charging a particular price level satisfying the equilibrium conditions.When wetalk about the marginal cost of production,it measures the additional change in the total costfor a commodity that has been incurred from the production of an incremental unit of output. Thecalculation of marginal cost involves dividing the additional change in the total cost ofproduction by one additional unit of output is produced (Posner, R. A., 1975).In the method ofcalculus, the calculation of marginal cost involves finding the first order derivative of any givenfunction of total cost in respect of the quantity.Suppose that we are given thatthe total cost of production for ten units of the pen is $50 and further total cost of producing 11units of the pen is $55. Now, the marginal cost of production for the 11thunit would be thechange in the total cost of production that has taken place as a result of the additional productionof one unit i.e. $5.When we talk about the marginal revenue,it isdefined as the additions made to the revenue (whether positive or negative) that occurs whenthere is sale of additional unit of quantity that has been produced. Through the calculus method,the marginal revenue is defined as to be calculated in the form of first order derivative of thetotal revenue function with an additional unit of the quantity being produced.If suppose that the price of a pen is given to be $5 and in a company, there are 20 pens producedin each day then the total revenue is calculated by the product of the price with the total numberof units produced i.e. 5*20 = $100. Now suppose Similarly if 21 units of a pen are sold then thetotal revenue will be $105. So, in this case, marginal revenue from selling 21stadditional unit is$5.In the case of imperfect competition, the aim of every firm as we discussed above is to earn anoptimum level of profits. This implies that they want to maximize the difference between theirreturns i.e. the total revenue as well as the total cost. As long as, the marginal revenue earnedfrom the sale of a commodity is larger than the marginal cost associated with selling it, it will beprofitable for the firm to pursue its sales (Baumol, W. J., & Blinder, A. S., 2015).However, justafter the point wherethe marginal cost starts to exceed the marginal revenue, there will be lossesto the firm, and it will stop selling and producing.Now the important point to note here is thatthis relationship between marginal revenue as well as the marginal cost here will be crucialto the determination of the price level. This is shown as in figure 1.In figure 1, the marginalrevenue curve, as well as the demand curve, are different from each other as well as downwardsloping because under imperfect completion more output can only be sold by lowering the price