EGT1 TASK 1

According to McConnell and Brue, marginal revenue is the

change in total revenue that results from the sale of 1 additional unit
of a firms product; equal to the change in total revenue divided by the
change in the quantity of the product sold (McConnell & Brue, 2008,
pg. G-15).

The relationship between total revenue and marginal

revenue is purely mathematical. The formula for total revenue is total

revenue = price X quantity.
McConnell and Brue also state that, marginal cost is the extra
cost of producing 1 more unit of output; equal to the change in total
cost divided by the change in output (McConnell & Brue, 2008, pg. G15). The marginal cost is directly related to total cost because
marginal cost is the change in the total cost of a single unit that can be
produced. Since total cost is the sum of fix cost and variable cost, the
marginal cost directly affects the variable cost of the product which in
turn changes the total economic cost of production for a product.
Profit is the total amount of money received by a business minus
the total cost it takes to run that business. I learned this during my
brief stint as the sole owner of an unsuccessful Travel Agency. I also
learned that, if a business fails to turn a profit, then the business will
go bankrupt and the doors will be closed forever. In order to remain in

business and be successful a business may seek to maximize their

profits by using the profit maximization concept. Profit maximization
is something that businesses use to decide a specific price and a
specific output level for a product to generate the most profit
(Wikipedia). A profit maximizing firm can determine its optimal level of
output by subtracting the marginal cost from the marginal revenue
that a product generates. Using marginal cost and marginal revenue as
criteria, the firm will reach the profit maximization point when
marginal revenue is equal to marginal cost. If a profit maximizing firm
find that the marginal revenue is greater than marginal cost the firm
would need to increase production until marginal revenue is equal to
marginal cost. However, if the firm finds that the marginal revenue is
less, then their marginal cost, then the firm will need to reduce
production of the product until MR is equal to MC.
It is very important for a business to know and understand the
concepts of marginal revenue, marginal cost, and profit maximization
so that the business can take the necessary steps to adjust their
business strategy accordingly so that it can grow into a productive,
profit earning business. Had I known the difference between these
concepts and recognized their importance I may still be in business
today.

Works Cited
McConnell, Campbell R. & Brue, Stanley L. Economics: Principles,
Problems, and Policies. 7th ed. McGraw-Hill, New York, NY
Profit Maximization Concept, retrieved on 4/18/10 from Wikipedia,
http://en.wikipedia.org/wiki/Profit_maximization#Marginal_costmarginal_revenue_method