ost are equal. Marginal revenue is the per-unit selling price of a product or service, while marginal cost is the

Marginal Revenue and Marginal Cost Explained

1. Definition of Marginal Revenue (MR): Marginal revenue refers to the additional income received from selling one more unit of a product or service. It is calculated as the change in total revenue divided by the change in quantity sold. For firms operating under perfect competition, marginal revenue equals the market price of the product.

2. Definition of Marginal Cost (MC): Marginal cost is the additional cost incurred from producing one more unit of a product. It is derived by calculating the change in total cost that results from producing an additional unit of output, expressed mathematically as: $MC = \frac{\Delta TC}{\Delta Q}$ where $\Delta TC$ is the change in total cost, and $\Delta Q$ is the change in quantity produced.

3. Cost Equalization: In a perfectly competitive market, firms maximize profit by producing up to the point where marginal revenue equals marginal cost (MR = MC). At this equilibrium, the firm is neither making a profit nor a loss on the last unit produced, indicating efficient production levels.

4. Conclusion: Understanding the relationship between marginal revenue and marginal cost is crucial for businesses in making strategic production decisions. By focusing on where these two curves intersect, firms can optimize their output and maximize profitability effectively.