Glamor Economics

Chapter 62

Chapter 9 Section 2 Will it be profitable to produce one more unit of product—marginal cost and benefit
Profit maximization is an important goal of an enterprise. When measuring how to achieve profit maximization, there must be an objective standard.On this issue, economists have given a standard that "marginal revenue equals marginal cost".Marginal revenue is the increase in income per unit of product sold, and marginal cost is the variable cost of worker wages, raw materials, and fuel that is increased for each unit of product produced.

In economics, it is usually analyzed by calculus in advanced mathematics.Marginal revenue is represented by MR, and marginal cost is represented by MC. When you see that the condition of "MR=MC" is established, it means that the company has achieved its dream goal, that is, profit maximization.Let us illustrate with an example:
Suppose there is a leather shoe factory that takes inventory after a sales period ends.Its total income is all the income after selling the leather shoes.Its average income is the increased income for each pair of leather shoes sold, or more formally, "the income earned per unit of product sold".Assuming that the shoe factory produces a unit of product, that is, the increased income of producing a pair of leather shoes is 20 yuan (marginal revenue), and the marginal cost of producing an additional pair of leather shoes is 15 yuan, then the enterprise must increase production to maximize profits , Earn as much money as you can.However, if the marginal revenue of a pair of leather shoes is 20 yuan, but the marginal cost becomes 25 yuan, and the shoe factory will lose 5 yuan for each unit of product produced, then the enterprise must reduce production, because it is "subsidizing money". sell goods".Only when the marginal revenue and marginal cost are equal (both are 20 yuan), the enterprise will neither increase nor decrease output, which means that the enterprise has realized the maximum profit.

In this example, the price of leather shoes is set constant, so its marginal revenue does not change, but the marginal cost of producing leather shoes is changing.This is why?Here, the change of marginal cost also needs to be explained.

Marginal costs are often changing, such as rail freight.Costs can be expressed in ton-kilometres.Assuming that the cost of a certain railway section is 5 cents per ton-km when the transportation is saturated, the marginal cost can be regarded as 0.05 yuan/ton-km for the time being.If the traffic volume is increased on the basis of this saturation, its revenue will naturally increase, but its profit will decrease.why?Because for railways, this often means major technical transformation, such as replacing high-powered locomotives, laying auxiliary rail lines, etc., and these technical measures require huge investment and must be included in the cost.That is to say, in the case of saturated transportation, if the transportation volume is to be increased, the marginal cost will not be 0.05 yuan/ton-kilometer, but will increase rapidly.If shipping pricing stays the same, rail freight will become less profitable quickly.This situation is the same for production-oriented enterprises.When the output is very low, the cost of producing one more product (such as machine loss, electricity, etc.) will show a downward trend; but when the production scale is exceeded, the marginal cost will rise sharply (factors that cause it to rise include the excess of the machine load operation, overtime pay for workers, etc.).

The function of marginal cost is to study the change law of cost, cooperate with marginal revenue, and calculate marginal profit, which is an important reference for manufacturers to formulate production plans.

When marginal revenue - marginal cost = marginal profit > 0, the program is feasible.

When marginal revenue - marginal cost = marginal profit < 0, the program is not feasible.

The income of increasing a unit of output cannot be lower than the marginal cost, otherwise losses will inevitably occur; as long as the income of increasing an output can be higher than the marginal cost, even if it is lower than the total average unit cost, the profit will be increased or the loss will be reduced.Therefore, the calculation of marginal cost plays an important role in making product decisions.

[links to related words]

Marginal cost is the cost that increases immediately after increasing output by one unit.

Marginal revenue refers to the increased revenue from increasing the sales of one unit of product, that is, the revenue obtained from the sale of the last unit of product.

Diminishing marginal returns In the case of constant technology level, when a variable factor of production is put into one or several constant factors of production, the initial increase of this factor of production will increase the output, but when When it exceeds a certain limit, the increased output will decrease gradually, and finally the output will be absolutely reduced.

According to this law, if the same increment of one input is continuously added (and if the other inputs are held constant), the resulting increment of product will decline beyond a certain point, that is, the marginal product will will decrease.

Marginal product refers to the increase in total output due to the addition of the last unit of a certain input (that is, factors of production, with the quantities of other inputs remaining constant).

(End of this chapter)