Micro CHAPTER 3.5:

CHAPTER SUMMARY

Every time a business produces an additional unit, it has a marginal revenue and marginal cost of doing so. The marginal revenue is equal to the selling price of the unit - unless they sell for different prices to different people, marginal revenue should be the same for every unit. The marginal cost is how much more it costs to produce one more unit.

Marginal revenue (MR) is generally represented as a flat line, showing that the selling price is the same for every unit. Marginal cost is shown as a curved line which starts downward-sloping then curves upward, representing diminishing marginal returns. This can be seen on the chart on the left.

When marginal revenue is higher than marginal cost, that means the firm would make greater profit by increasing production. When marginal revenue is lower than marginal cost, the firm is losing profits by producing more. Because of this, the profit maximization point, which tells us how much the firm should produce in order to make the most profit possible, as found at the point where MR = MC.

To find out how much profit we will make at that point, we need to check the ATC (average total cost) at the quantity where MR = MC. Then, we can calculate (MR - ATC) * Quantity = the total profit made at the profit maximization point.

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