Explain the concept of marginal revenue and its relationship with production costs.

Explain the concept of marginal revenue and its relationship with production costs.

Marginal revenue refers to the additional revenue generated from selling one more unit of a product. It is calculated by dividing the change in total revenue by the change in quantity sold.

The relationship between marginal revenue and production costs is crucial in determining the profitability of a firm. If the marginal revenue exceeds the marginal cost (the additional cost of producing one more unit), it indicates that producing additional units is profitable. In this case, the firm should continue to increase production to maximize its profits.

However, if the marginal revenue is less than the marginal cost, it implies that producing additional units would result in a loss. In such a scenario, the firm should reduce production to minimize losses.

Ultimately, the goal of a firm is to produce at the level where marginal revenue equals marginal cost. This is known as the profit-maximizing level of production. At this point, the firm is neither making a profit nor incurring a loss.