What Is the Difference Between Marginal Cost and Marginal Revenue?

The marginal cost of production and marginal revenue are economic measures used to determine the amount of output and the price per unit of a product that will maximize profits.

A rational company always seeks to squeeze out as much profit as it can, and the relationship between marginal revenue and the marginal cost of production helps them to identify the point at which this occurs. The target, in this case, is for marginal revenue to equal marginal cost.

What Is the Difference Between Marginal Cost and Marginal Revenue? Marginal cost is the extra expense a business incurs when producing one additional product or service. Marginal revenue, on the other hand, is the incremental increase in revenue that a business experiences after producing one more product or service.

Marginal Cost and Marginal Revenue

Marginal cost formula

To calculate marginal cost, you need to know how much your companys variable costs have increased and how many additional units your business has produced. Then you can use the formula below to gauge the cost of producing one more item:

Marginal cost = change in total cost / change in quantity

What is marginal cost?

To optimize marginal cost and revenue, its essential to understand a few standard production terms. Every business that generates production costs can divide them into two key categories:

Marginal cost reflects the extra expense of manufacturing one additional item. As such, it incorporates variable costs like additional labor or materials required to increase production.

Calculating the marginal cost of another production run is important because the math can change depending on the scale. In many cases, producing the second, third or fourth extra unit may cost much less than the first. Thats because efficiency tends to rise as production increases, and rates for raw materials generally decrease as demand grows. As a result, significant surges in production levels can lead to a much lower marginal cost and a much bigger financial benefit for your company.

Marginal revenue formula

To calculate marginal revenue, you have to input how much revenue has increased and how many more items your company has produced. Then you can assess the revenue youll generate from producing an extra unit:

Marginal revenue = change in total revenue / change in quantity

What is marginal revenue?

Essentially the opposite of marginal cost, marginal revenue refers to the extra revenue your business can generate by selling one additional unit. This number is different depending on the market circumstances:

Marginal revenue vs. marginal cost

When you adjust for marginal revenue, the cost may also change, which can affect your optimal production levels. To compare marginal cost vs. marginal revenue, its helpful to understand how these two numbers behave in relation to one another:

How to increase marginal revenue

Marginal cost and revenue are intertwined, so to change one, you often need to change the other. To increase marginal revenue, you need to decrease the marginal cost or set a higher sale price. However, increasing marginal revenue isnt always desirable. An overly high marginal revenue indicates that customer demand is higher than your companys supply. That means your business may be neglecting opportunities for profit, which you can capitalize on by increasing output.

Ultimately, analyzing these two numbers and how they impact each other is critical to maximizing your profit. Once you balance the two, you can determine exactly how many units to produce to reach your organizations profit goals.

Marginal cost example

Your business may be able to produce 1,000 soccer balls for $20,000. To produce 1,001 soccer balls, the cost may increase to $20,010. If you use the standard formula, your marginal cost would be:

($20,010 – $20,000) / (1,001 – 1,000) = $5

As an alternative example, your company may typically produce 1,000 soccer balls for $20,000. If you increase output significantly and produce 11,000 soccer balls total, your cost may be $50,000. In this case, your marginal cost would be:

($50,000 – $20,000) / (11,000 – 1,000) = $3

Marginal revenue example

When your company sells its first video game, revenue might be $10. Revenue from the second game may be $5. In this example, your companys marginal revenue would be:

($10 – $5) / (2 – 1) = $5

In another example, you might sell 100 video games and generate $10 in revenue for each sale. Later, you may be able to increase the sale price and sell the next production run of 100 video games for a total revenue of $3,000. In this situation, your marginal revenue would be:

($3,000 – $1,000) / (200 – 100) = $20

FAQ

What is the difference between marginal revenue and marginal cost quizlet?

Marginal cost is the money paid for producing one more unit of a good. Marginal revenue is the money earned from selling one more unit of a good.

What is the difference between revenue and marginal revenue?

The Average Revenue is defined as the revenue that an organisation can avail by selling a unit of their product or service. The Marginal Revenue is defined as the income that an organisation can avail by selling an additional unit of their product or service.

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