Marginal cost and marginal revenue are important concepts for businesses because they help determine how much money a company can make when producing an extra unit of a good or service. You can determine the profitability of a business by analyzing these two terms.
Marginal cost is the cost of producing one more unit of a good or service. The higher the marginal cost, the more expensive it becomes to produce an additional unit.
Marginal revenue is the income earned from selling one more unit of a good or service. The higher the marginal revenue, the more money an entrepreneur will make from each sale.
The critical difference between marginal cost and marginal revenue is that marginal cost reflects the incremental costs of producing an additional unit of a good or service. In contrast, marginal revenue reflects the increased income that results from producing an additional unit of a good or service.
Let’s discuss these concepts in detail.
What Is Meant By Marginal Cost?
Marginal cost is a term in economics that refers to the cost of producing an additional unit of a good or service.
The marginal cost of production can be different for different output levels because it takes more resources to produce an extra unit of a good or service when output is already high than when output is low. It is also sometimes called an incremental cost.
The term “marginal cost” is often used in economics when discussing the trade-off between two products. For example, if a company produces two products—one with an increased production cost and one with a decreased production cost—it may choose to produce the product with the decreased production cost.
In this situation, the company would maximize its profit by producing the product at a lower production cost.
What Is Meant By Marginal Revenue?
Marginal revenue is a term in economics that refers to the additional money a business generates from its sales above and beyond what it costs to produce those sales.
Marginal revenue is substantial because it tells businesses how much they can charge for their products without losing too much money. For example, if a company sells widgets for $10 per unit and it costs the company $1 to produce each widget, its marginal revenue is $9.
When businesses make a product, they incur costs associated with making that product. For instance, the cost of producing the raw materials used in a product might come from the company’s budget. To cover those costs and profit, a company must generate more revenue than it spends on expenses. This is where marginal revenue comes into play.
Marginal revenue is important for two reasons:
- First, it helps businesses determine how much they should charge for their products to earn a profit.
- Second, marginal revenue can allocate resources among different products or services.
What’s The Difference?
Marginal revenue and marginal costs are two key concepts in economics. Marginal means “relating to the margin,” and it’s used to describe how much something changes when one additional unit is added to a quantity or group of units.
In economics, marginal revenue and marginal cost are used to calculate the profitability of a business or individual activity.
The main difference between marginal cost and marginal revenue is that marginal cost is always lower than marginal revenue. This is because the company will lose money on every additional unit it produces. Marginal revenue, on the other hand, will always be higher than marginal cost. This is because companies will make money on every extra unit they sell.
Apart from that,
- The marginal revenue is the revenue earned from producing an additional unit of output, while the marginal cost is the cost of producing that unit.
- The marginal cost of a good is the incremental cost necessary to produce an extra unit of that good. The marginal revenue of a good is the increase in income resulting from producing an extra unit of that good.
- If you know your marginal cost, you can determine your minimum price for a product or service, and if you know your marginal revenue, you can determine your maximum price for a product or service.
- Moreover, marginal costs apply to products and services, while marginal revenue applies to companies.
Here is a table of differences between both terms to understand them in depth.
| Marginal Cost | Marginal Revenue |
| The marginal cost is what you pay for producing an extra unit of output. | The marginal revenue is what you get for producing an extra unit of output. |
| It applies to the products and services. | It applies to companies. |
| It is relatively lower than the marginal revenue. | It is relatively higher than the marginal cost. |
Watch this interesting video clip that will further clarify these two concepts for you.
Why Is Marginal Cost Important?
Marginal cost is essential because it determines the amount of output a company can produce.
The higher the marginal cost, the more expensive it becomes to produce an additional output unit. Marginal cost also helps businesses decide when producing a good or service is profitable.
Costs And Revenues: What Is Their Relationship?
The relationship between cost and revenue determines how profitable a company is. Cost is the amount of money that is spent to produce a good or service. A company’s revenue comes from selling a good or service.
They are related because the cost tends to decrease when revenue increases, and vice versa. Cost and revenue are related positively, which is called “cost-effectiveness.” When cost and revenue are related negatively, this is called “cost overruns.”
How Is Marginal Cost Calculated?
Marginal cost measures the change in total costs associated with producing one more unit of a good or service.
Marginal costs can be calculated in various ways. Still, the most common way to calculate the marginal cost is to take the total cost of production—including variable and fixed costs—and divide it by the number of units produced.
Marginal costs can be calculated by finding the slope of the tangent to the production function at the point of inflection (the point where total costs change sign).
Final Thoughts
- A business has two financial terms: marginal cost and marginal revenue. These concepts describe how much it costs to produce and sell an additional unit of a good or service.
- Marginal cost describes the cost incurred when producing an additional unit of a good or service. In contrast, marginal revenue describes the revenue earned from selling an additional unit of a good or service.
- The marginal cost usually increases as production increases, while marginal revenue remains relatively constant.
- The marginal revenue is always higher than the marginal cost. It means that marginal cost decreases as more units are produced while marginal revenue increases.
- Marginal revenue is always calculated with reference to a company, unlike marginal cost, which is calculated with reference to a product.
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