Bachelor of Science, Business Management
The scope of this paper is to define how firms maximizing their profit and identify what their ideal output levels should be and how profit maximizing businesses often react to marginal revenue of varying levels. The definition of Marginal revenue is the extra revenue that will be made when one additional unit of any given product is sold. The sum of sales or a pre-determined quantity of a particular product is called total revenue. “Marginal revenue tells a firm how much additional money selling each additional product will gross; total revenue tells a firm how much they will make by selling any given quantity. Marginal cost is the cost a firm incurs to produce one more unit of a product. Total cost is the total cost economically a firm pays for producing a given quantity of a certain product.” (Stariana, November 2012) Profit is the total revenue after a firm pays operating costs. The course of action that a firm takes to determine what they will charge per unit of production and how much it will produce and in order to provide the firm with the greatest possible profit in a specified time frame is called Profit maximization. A profit maximizing firm will often determine its optimal output level by finding the point where marginal cost is equal to marginal revenue. Producing an additional unit of product is then equal to the amount of extra revenue costs. This is the point or peak of the firms potential profit maximization. Any additional units produced after this point will result in costing the firm money, resulting in a negative or zero marginal revenue. If a profit maximizing firms’ marginal revenue is greater than marginal cost, the firm will keep adding additional units to production as long as marginal cost is greater than or equal to marginal revenue. If a profit maximizing firm’s marginal revenue is less than marginal cost, the firm will most likely need to reduce output levels to the point of the desired output where marginal revenue is
again equal to marginal cost.