3.05: Getting the Most for Your Money – Flashcards

Cost of producing one additional unit of a good or service of production

Revenue gained w/ production of one additional unit of a good or service

At some point, adding resources will result in less output per additional unit of product

Using marginal cost analysis, a business owner can determine the price and quantity that will maximize the firm's profits. This point is where the marginal revenue curve and the marginal cost curve intersect. Remember that the marginal revenue curve is the same as the demand curve for the product.

Production for a company that manufactures goods requires significant investment in equipment and machinery. Then, the company may add employees and produce goods efficiently and at a lower cost per item resulting in a downward slope. At some point, however, hiring additional workers will not result in a lower cost per item as the company may not have enough equipment for the new employee. At that point, the marginal cost curve begins to curve upward due to the Law of Diminishing Returns.

To maximize profit, a firm should set price and quantity closest to where marginal revenue equals marginal cost.