Marginal cost – the cost to make one extra unit of output. It is the difference between total costs at various levels of output
Marginal revenue – the extra revenue earned from the sale of one extra unit. It is the difference between total revenue at various levels of output.
We can use marginal cost and revenue to help a business:
- Acts as a guide for the level of production
- Firms should keep producing more output as long as each additional unit adds more to MR than it does to MC. (MR>MC)
Marginal cost and revenue are also linked to contribution as it is an alternative way of calculating contribution:
We use but we can also use
Contribution = SP – VC Contribution = MR-MC
The law of diminishing marginal productivity means that adding input will increase revenue but as time goes on, this will then decrease.