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# Marginal revenue and marginal cost

Given the cost of producing a good, what is the best quantity to produce? In this video we explore one of the most fundamental rules in microeconomics: a rational producer produces the quantity where marginal revenue equals marginal costs.  Created by Sal Khan.

## Want to join the conversation?

• Why not just produce at 8000 units instead of 9000 units? Wouldn't you make the same profit (\$140; total revenue - total cost)? It seems that producing 9000 is a waste of time because you're not making any extra profit on that 1000 additional units. • what is true when the marginal revenue and marginal cost are equal? • When marginal revenue equals marginal cost, it means that the additional revenue generated from selling 1 more unit (of whatever it is you're selling) exactly offsets the additional cost of producing that 1 unit.

In a perfectly competitive market, firms will increase the quantity produced until their marginal revenue equals marginal cost. This is because when marginal revenue is greater than marginal cost, the difference represents profit to be earned (and firms are assumed to be "profit-maximizing" and, when dealing with perfect competition, "price-takers").
Also, remember, if Marginal cost is GREATER than Marginal Revenue, then a firm won't produce any more goods (because that would be like burning money...).
Does this make sense?

Hope this helps!
• If Marginal Revenue = Price and Price multiplied by Quantity = Total Revenue, then why does the Total Revenue - Total Cost not equal the Profit calculated?

0.02 x 9000 = 180 (Quantity x (MC-ATC)
0.50 x 9000 = 4500 (Quantity x Price)
4500 - 4360 = 140 (TR - TC)

I can't work out why these don't match? • Wont it make a great profit if the MR>MC compared to when MR=MC? Since MR and MC offset each other. • No. Marginal revenue is the amount of revenue one could gain from selling one additional unit. Marginal cost is the cost of selling one more unit. If marginal revenue were greater than marginal cost, then that would mean selling one more unit would bring in more revenue than it would cost. If that is the case, then why would you not sell that additional unit?
• What happens when marginal cost intersects the marginal revenue curve twice? Which quantity is the profit maximizing quantity? • Will in some cases I would prefer to produce the number of units where my average total cost is minimum? Because in that case while my revenue will be less; but my profit margin would be greater? (Clearly this argument is not applicable to this case as margin is too small) • Profit margin is always greatest when MC=MR even if ATC is lowest elsewhere, this is what leads to inefficiency in market structures that aren't in perfect competition such as an oligopoly. This is because MC is the cost for the next unit and MR is the revenue gained for that same unit. If MC>MR then it will always shrink your profits since you incur more in cost for that unit then you gain in revenue. If MR>MC then you will always increase profits as the revenue gained from that next unit exceeds the cost for that unit. If MR=MC=ATC=P then it is efficient.
Just to show how the lowest ATC can hurt profits, if ATC=50 and MC=49 and MR=1, then despite the fact that the ATC will decrease (MC<ATC) the profit margin will decrease since TC (total cost) increases by 49 while TR (total revenue) increases by just 1.
• Why the company's management would not want to produce and sell either more or less than the equal amounts of marginal cost and marginal revenue? • When marginal cost equals marginal revenue, then profit is maximized. When marginal revenue is greater than marginal cost, that means creating one more product would bring more in revenue than it would cost, so profit would increase. When marginal revenue is les than marginal cost, creating that last unit cost more than it brought in as revenue, so profit had decreased.
• Why is there a dip in the marginal cost curve? I don't really get it. Help anyone?
(1 vote) • Sal explained this in the previous video: 'Marginal cost and average total cost' at . The marginal costs go down for the first 3000 gallons of juice. After that we're encountering a small problem.
The local, cheap suppliers ran out of oranges, so we have to move to other suppliers if we want to make and thus sell more juice. The new suppliers are probably slightly further away, so we have to make more costs for transportation. It's also possible those suppliers charge a higher price for their oranges.
There are more reasons to think of, but I hope those give you an idea of why the marginal costs increase.
• At , why exactly does marginal cost rise? • The answer to this question takes us to concept of efficiency and inefficient production. I would add certain more assumptions to above example mentioned by Sal. Suppose the Juicer you have capacity of juicing 10,000 oranges a day efficiently, and after juicing 10,000 oranges, it gets heat up, consumes more energy and produces juice at higher cost. So the variable cost of juicing oranges beyond 10,000 is more than till 10k. Juicer is becoming less efficient and that's why marginal cost is rising. As we might see in later videos, you might consider buying another juicer and add to your fixed cost to reduce this variable cost.
• I've learned that a company should shut down in the short-run if the market price falls below the AVC. From this video, it seems like it should already be doing so when the price (=marginal revenue?) falls below MC? What am I misinterpreting? [example source: http://study.com/academy/lesson/average-variable-cost-avc-definition-function-equation.html]

With the example given in this lecture, what would occur if the market price falls to 0.4? It would still be above AVC but below MC.

Or is the difference simply that MC can turn out to be the same as AVC with constant unit costs (as in https://www.youtube.com/watch?v=7XDEo2o-wm0&index=2&list=PLMrpXL7ZxXYXIStJLFOAoYv2hPDhXMNQB)?
(1 vote) • I disagree with the claim in the video of study.com that you should keep producing until the TVC gets above the price while I agree with the claim in Khan Academy's video that you should keep producing as long as MR is larger than MC.

Let's use the data in the Khan Academy video to show why I think that.
When you keep producing until AVC = MR, you will produce 10,000 gallons of juice. The revenue is 10,000 * 0.4 = 4,000 and the total costs are 4,910, so the loss is \$910.

When you keep producing until MC = MR, you will produce 7,000 gallons of juice. The revenue is 7,000 * 0.4 = 2,800 and the total costs are 3410, so the loss is \$610. This loss is lower, so producing 7,000 gallons is wiser than producing 10,000 gallons.

On a final note, yes, price = marginal revenue. I hope this cleared things up.