Marginal revenue (MR) is the additional revenue for each additional unit produced. Marginal cost (MC) is the additional cost for each additional unit produced. For example, if you have produced 100 units, the marginal cost would be how much it would cost to produce the 101st unit. Likewise, the revenue earned by selling the 101st unit would be the marginal revenue.
Understanding marginal revenue and marginal cost can make a difference in a business's decision to continue production at the current level, produce more, or produce less. This relationship is vital to leadership and managers because it helps inform a producer about a product's equilibrium and can act as a guide to profit maximization.
This week, discuss the following:
- Think about a personal experience where you have considered the revenue of an additional unit produced versus the cost of producing it. How do you think this might affect the decision making process? Discuss an example.
- We have learned that there is a Goldilocks area where a company should produce a product to the
point where MR = MC. What does MR = MC mean,
and why is it important for pricing and production?
Give an example. - As a manager or leader, how would you apply this knowledge to make better production volume decisions?