Economics Profit Maximization Questions Medium
In profit maximization, marginal revenue refers to the additional revenue generated by selling one more unit of a product or service. It is the change in total revenue resulting from the sale of an additional unit.
To understand the concept of marginal revenue in profit maximization, it is important to consider the relationship between marginal revenue and marginal cost. In a perfectly competitive market, firms aim to maximize their profits by producing at a level where marginal revenue equals marginal cost.
When a firm increases its production and sells one more unit, it generates additional revenue. However, this additional revenue may not be equal to the price at which the firm sells its product. This is because in order to sell one more unit, the firm may have to lower the price for all units sold, resulting in a decrease in revenue for the previously sold units.
As a result, the marginal revenue is typically lower than the price of the product. This is because the firm has to lower the price to attract additional customers and increase its sales. Therefore, the marginal revenue curve is downward sloping.
To maximize profits, a firm should continue producing and selling additional units as long as the marginal revenue exceeds the marginal cost. Once the marginal revenue becomes equal to the marginal cost, the firm has reached the point of profit maximization.
In summary, marginal revenue in profit maximization refers to the additional revenue generated by selling one more unit of a product or service. It is important for firms to consider the relationship between marginal revenue and marginal cost in order to determine the optimal level of production and maximize their profits.