Marginal revenue and marginal cost are important concepts in economics that refer to the additional revenue and cost that a company incurs as a result of producing one more unit of a good or service. These concepts can be represented graphically on a marginal revenue and marginal cost graph, which helps to illustrate the relationship between these two variables and the optimal level of production for a company.
The marginal revenue curve is a graphical representation of the change in a company's total revenue as it increases its output by one unit. In other words, it shows the additional revenue that a company receives from selling one more unit of a good or service. The marginal revenue curve is typically downward sloping, which means that as a company increases its output, the marginal revenue it receives from each additional unit decreases. This is because as a company produces more of a good or service, it becomes increasingly difficult to find buyers willing to pay a higher price for it.
The marginal cost curve is a graphical representation of the change in a company's total cost as it increases its output by one unit. In other words, it shows the additional cost that a company incurs as a result of producing one more unit of a good or service. The marginal cost curve is typically upward sloping, which means that as a company increases its output, the marginal cost of producing each additional unit increases. This is because as a company produces more of a good or service, it typically incurs additional costs such as labor, materials, and overhead.
When a company is deciding how much of a good or service to produce, it is important to consider both the marginal revenue and marginal cost of each additional unit. This can be done by comparing the two curves on a marginal revenue and marginal cost graph. The optimal level of production for a company is the point at which the marginal revenue curve intersects the marginal cost curve. At this point, the additional revenue that the company receives from producing one more unit is equal to the additional cost it incurs as a result of producing that unit.
For example, consider a company that produces widgets. The marginal revenue curve for the company might look like this:
[Insert marginal revenue curve graph here]
As the company increases its output of widgets, the marginal revenue it receives from each additional widget decreases. This is because as the company produces more widgets, it becomes increasingly difficult to find buyers willing to pay a higher price for them.
The marginal cost curve for the company might look like this:
[Insert marginal cost curve graph here]
As the company increases its output of widgets, the marginal cost of producing each additional widget increases. This is because as the company produces more widgets, it incurs additional costs such as labor, materials, and overhead.
When the marginal revenue curve and the marginal cost curve are compared on a graph, the optimal level of production for the company is the point at which the two curves intersect. At this point, the additional revenue that the company receives from producing one more widget is equal to the additional cost it incurs as a result of producing that widget.
In summary, the marginal revenue and marginal cost graph is a useful tool for illustrating the relationship between marginal revenue and marginal cost and the optimal level of production for a company. It helps companies make informed decisions about how much of a good or service to produce in order to maximize their profits.
