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Business owners, managers, aspiring entrepreneurs form business organization selec t-based considerations, including taxes, liability, capital contributions, sharing profits losses, management control, survivorship.
Marginal cost and marginal revenue
Marginal revenue
The concept of marginal revenue is generically understood as the additional revenue the company generates from the sale of one more unit of its product or service. In a different formulation, the marginal revenue represents the money generated by the sale of the last item, be it product or service.
The marginal revenue is computed through the division of the change in total revenue by the change in quantity of sold items. This computation method also represents the relationship between the marginal revenue and the total revenue.
MR = Change in TR / Change in Q, where
MR is the marginal revenue
TR represents the total revenues, and Q. represents the quantity of items sold (Economics. Fundamental Finance).
Marginal cost
Similar to the marginal revenue, the marginal cost also refers to the change incurred relative to the unit of one product or service. Specifically, the marginal cost represents the change in total costs which is incurred as one more unit of product is being produced.
"The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. More formally, the marginal cost is the...
In other words, the marginal costs helps create advantages of the scale economy and allows manufacturers to find the optimal point at which profits are maximized.
3. Profit and profit maximization
The profit is computed by subtracting the total costs from the total revenues:
Profit = Total Revenue -- Total Expenses
The profit as such represents the amount of money that is left from the company's revenues after all costs have been covered. These costs include operational expenses, personnel costs, utilities, taxes as well as any other costs incurred in the efforts to make the business sustainable.
The profits do not belong to the organizational entity, but to the owner of the business. In turn, the owner / the owners are the ones to decide how the profits would be used. They could be reinvested in the firm, saved, invested in other personal and professional endeavors and so on (Investopedia).
The primary scope of each economic agent is that of maximizing its profit. Profit maximization traditionally refers to sustained efforts by which companies strive to generate more revenues, while decreasing costs. The Investor Words website explains:
Profit maximization refers to "a process…
References:
Marginal revenue, Economics. Fundamental Finance, http://economics.fundamentalfinance.com/micro_revenue.php last accessed on July 29, 2011
Marginal cost (MC), EconModel, http://www.econmodel.com/classic/terms/mc.htm last accessed on July 29, 2011
Profit, Investopedia, http://www.investopedia.com/terms/p/profit.asp last accessed on July 29, 2011
Profit maximization, Investor Words, http://www.investorwords.com/7690/profit_maximization.html last accessed on July 29, 2011
Profit maximization, Nowsell, http://www.nowsell.com/marketing-guide/profit-maximization.html last accessed on July 29, 2011
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