Profit Maximization Is Taken From Two Different Sources That Counterbalance Each Other?

Submitted By budge13
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Bridget Hutchings - 228303 EGT1 - Task 309.1.1.05, 06

Profit Maximization is taken from two different sources that counterbalance each other. This is best described as total revenue (TR) vs. total cost (TC). Total revenue is measured as a firm's total profit from a service delivered or sales of products. This total amount of revenue or sales comes from consumer spending. However, total cost includes all purchases of labor, raw materials, transportation, production, distribution, or any other amount that is incurred by the firm for their services or product. In order to calculate a profit, a firm would subtract the total cost from their total revenue. The profit maximum would occur when the difference between total revenue and total cost is at it's maximum amount. In order to define marginal revenue (MR), you first must understand marginal cost. Marginal cost (MC) is the additional cost affiliated with producing an additional service or product for consumers. It is calculated by taking the change in cost and dividing it by by the change in unit production. After a firm has calculated the marginal cost, if their cost is lower than the current value of the item, there is no need for them to lower their price to sell more units. Company A currently spends $50 to produce 2 products and $80 to produce 3. The marginal cost would be $30. It also shows that the cost increases $10 for every new product produced. Marginal revenue is the additional revenue or profit that a firm can achieve from offering more services or products. It can be calculated by taking the change in total revenue and dividing it by the change in the quantity sold. In a perfect situation, marginal revenue would equal the market price of the object being sold. However, when marginal cost is more than marginal revenue, a firm's total revenue will begin to decline. In the case of Company A, their marginal revenue was at it's peak at $150 and started to experience a slow decline as additional units were added. Eventually they ended with a $10 marginal revenue at 15 units.

Because marginal revenue is specified as a change in total revenue that happens when an additional unit of output is produced and sold, marginal revenue is the same as total revenue in respect to quantity. Equivalently, marginal cost is a change in total cost that happens when an additional unit is produced. So it is the same as total cost when taken in account to quantity. You can figure out the profit maximizing quantity by making the two derivatives equal to each other. The goal of any firm is to have profit maximization. Many strive to reach a point where marginal cost equals marginal revenue which helps them achieve the most out of production cost and generates sales. When marginal revenue is equal to marginal cost, profit is maximized. Every business should strive to reach the point where marginal revenue equals marginal cost to get the most out of their costs of production and sales generation. When marginal revenue is greater than marginal cost, greater…