Economics Short Run Vs Long Run Costs Questions Medium
Marginal revenue refers to the additional revenue generated from selling one more unit of a product or service. It is calculated by dividing the change in total revenue by the change in quantity sold.
In the short-run, marginal revenue is closely related to short-run costs. Short-run costs include both fixed costs and variable costs. Fixed costs are expenses that do not change with the level of production, such as rent or salaries, while variable costs vary with the level of production, such as raw materials or labor.
In the short-run, a firm's marginal revenue will determine its level of production. If the marginal revenue is greater than the marginal cost (the additional cost of producing one more unit), the firm will increase production. This is because the additional revenue generated from selling the extra unit is greater than the additional cost incurred. On the other hand, if the marginal revenue is less than the marginal cost, the firm will decrease production or even shut down, as the additional cost outweighs the additional revenue.
In the long-run, however, the relationship between marginal revenue and costs becomes more complex. In addition to fixed and variable costs, long-run costs also include costs associated with changing the scale of production, such as building new facilities or investing in new technology.
In the long-run, firms have more flexibility to adjust their production levels and make changes to their cost structure. They can enter or exit the market, change the size of their operations, or adopt new technologies. Marginal revenue in the long-run is influenced by the overall market conditions, including the level of competition and demand for the product or service.
In a competitive market, firms will adjust their production levels in the long-run until marginal revenue equals marginal cost. This is because in the long-run, firms have the ability to enter or exit the market, and if they are earning above-normal profits, new firms will enter, increasing competition and reducing prices. Conversely, if firms are incurring losses, some firms may exit the market, reducing competition and increasing prices.
Overall, the concept of marginal revenue is crucial in determining the optimal level of production in both the short-run and long-run. In the short-run, it helps firms decide whether to increase or decrease production based on the relationship between marginal revenue and marginal cost. In the long-run, it influences firms' decisions to enter or exit the market and adjust their production levels to achieve equilibrium between marginal revenue and marginal cost.