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DiscWeek2Supplement - Discussion Week 2 Supplement MR/MC vs...

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Discussion Week 2 Supplement: MR/MC vs. MP February 10, 2008 It is important to distinguish the difference between marginal revenue and marginal product, and how we apply marginal analysis to both. Let s recall the definitions: Marginal Revenue (MR): Additional revenue by producing one more unit of output (Y). Marginal Cost (MC): Additional cost of producing one more unit of output (Y). Marginal Analysis tells us that we want to compare MR to MC. This makes sense because if producing an extra unit causes costs to increase more than revenues, it does not make any sense to produce it. Example: Let s assume that I m producing iPods. Output (Y) Total Revenue Marginal Revenue Total Costs Marginal Costs 1 400 400 200 200 2 750 350 450 250 3 1050 300 750 300 4 1300 250 1100 350 Graphically: (note: not drawn to scale) MC $ 300 MR 3 Q (Ipods) Notice that marginal revenue is decreasing. It actually describes the demand curve. The marginal revenue from the first few iPod is higher than later iPods. Why does this make sense? Consider what the first iPod can earn in the market, compared to when iPods become more plentiful.
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