Common Economic Terms
EGT1 Task 1 In this paper I am going to define a few common economic terms and explain their relationships to other economic terms. I will also explain how profit maximizing firms determine their optimal level of output and how a profit maximizing firm will react to different levels of marginal revenue. Marginal revenue is the extra revenue that will be made by a firm when the firm sells one additional unit of a product.
Total revenue is simply the sum of a firm’s sales of a specified quantity of a particular product. So, while marginal revenue is telling how much extra money selling each additional product will make a firm, total revenue is telling how much the firm will make by selling a given quantity. Marginal cost is the what it will cost a firm to produce one more unit of product. Total cost is the total economic cost a firm incurs for producing a given quantity of a certain product.
Profit is simply the a firm’s total revenue after the firm pays for its operating costs, and profit maximization is the the course of action that a firm takes to determine how much they will produce and what they will charge per unit of production in order to provide the firm with the greatest possible profit in either the long run or the short run time frame of a firm.
A profit-maximizing firm determines its optimal level of out put by finding the point where marginal cost is equal to marginal revenue. Meaning that, when the cost of producing an additional, or extra, unit of product is equal to the amount of extra revenue. This point is the peak of the firm’s profit maximizing potential. An additional unit of product after this point will only result in costing the firm money, rendering marginal revenue as zero or negative.
If a profit maximizing firm’s marginal revenue is greater than marginal cost, the firm will continue adding another unit of product to production as long as marginal revenue is greater than or equal to marginal cost. If a profit-maximizing firm’s marginal revenue is less than marginal cost, the firm would need to reduce its output to the point of optimal output where marginal revenue is again equal to marginal cost. EGT1 Task 1 References McConnell, C. R. , Brue, S. L. , & Flynn, S. M. (2012). Economics: principles, problems, and policies. New York: McGraw-Hill.
