Marginal revenue in market economies
In market economies, the most important factor for firms is to find the production level that maximizes their profits. This means identifying, from a range of outputs, that level which generates the most turnover. Firms learn, for example, that when they slightly increase their output, there is a marginal profit that they get in return. Hence, every small increase in output produces an increase in the marginal profit (Samuelson amp. Marks, 38). Consequently, firms discover that they reach maximum profit when they make those small positive changes in the production level, which increase profit upwards. However, to analyze marginal profit, there are two elements that must be considered. The first component is the marginal revenue (MR), which is the extra profit gained on top of the marginal profit when the output quantity is increased (Samuelson amp. Marks, 44). This means that every increase in output generates further revenue. The second component is the marginal cost (MC), which is the extra amount that is needed to produce an extra quantity (Samuelson amp. Marks, 45). Usually this figure is constant for every additional unit of output. Thus far, the profit made by firms is arrived at by subtracting marginal cost from the marginal revenue (MR-MC). The difference is what is called the marginal profit. Nonetheless, firms maximize their profits when the additional MR equals the extra MC. Similarly, firms are said to maximize their profits when their average total cost (ATC) is at their lowest. Hence, it can be deduced that firms maximize their profits when MR equals MC, which also equals ATC (Samuelson amp. Marks, 47).
Accordingly, this analysis is important for the goodness of market economies because it provides the firms with the most necessary empirical association in market economies. For one, it tells firms to first examine their basic goal, which is profit. This is derived from the difference between MR and MC. Secondly. it informs firms that their decisions on prices and output quantity have significant impact on their market profits (Samuelson amp. Marks, 31). Finally, it informs firms that they must make good decisions to balance their demand and cost curves if they are to maximize their profits at the lowest ATC.
Samuelson, William F., amp. Marks, Stephen G. Managerial Economics. Massachusetts, MA: John Wiley amp. Sons, Inc., 2012. Accessed on 07/10/2014. Web link: https://www.sendspace.com/file/qgpjji