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BSA CORE 1
MANAGERIAL ECONOMICS

MODULE 2
(Wednesday)

 Marginal revenue curve

 How can the decision maker use profit changes as signposts pointing toward the
optimal output level?
 The answer is found by applying the maxim of marginal analysis:
o Make a small change in the level of output if and only if this generates an
increase in profit. Keep moving, always in the direction of increased
profits, and stop when no further output change will help.

 Profit maximization
o Maximum profit occurs at an output where marginal revenue is zero, that
is, the slope of the tangent line is zero.

Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.
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 Marginal cost (MC)

o Marginal cost (MC) is the additional cost of producing an extra unit of
output.

MC = Δ TC = change in total cost (TR)

ΔQ change in quantity (Q)

 Example:
Quantity Total cost Marginal cost
Q (units) TC ($) MC ($)
0 100 -
1 350 350-100/1-0 = 250
2 530 530-350/2-1 = 180
3 670 670-530/3-20= 140
4 770 770-670/4-3 = 100
5 850 850-770/5-4 =80
6 950
7 1100
8 1280
9 1530
10 1830

Profit maximization
 The firm’s profit-maximizing level of output occurs when the additional revenue
from selling an extra unit (MR) just equals the extra cost of producing it (MC),
that is, when MR = MC.

Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.
 3

SUMMARY
Decision-Making Principles
1. The fundamental decision problem of the firm is to determine the profit-
maximizing price and output for the good or service it sells.

2. The firm’s profit from any decision is the difference between predicted revenues
and costs. Increasing output and sales will increase profit, as long as the extra
revenue gained exceeds the extra cost incurred. Conversely, the firm will profit
by cutting output if the cost saved exceeds the revenue given up.

3. If economic conditions change, the firm’s optimal price and output will change
according to the impact on its marginal revenues and marginal costs.

4. The basic building blocks of the firm’s price and output problem are its demand
curve and cost function. The demand curve describes (1) the quantity of sales for
a given price or, conversely, (2) the price needed to generate a given level of
sales. Multiplying prices and quantities along the demand curve produces the
revenue function. The cost function estimates the cost of producing a given level
of output. Combining the revenue and cost functions generates a profit prediction
for any output Q.

5. The next step in finding the firm’s optimal decision is to determine the firm’s
marginal profit, marginal revenue, and marginal cost.
a. Marginal profit is the extra profit earned from producing and selling an
additional unit of output.
b. Marginal revenue is the extra revenue earned from selling an additional
unit of output.
c. Marginal cost is the extra cost of producing an additional unit of output.
d. By definition, marginal profit is the difference between marginal revenue
and marginal cost: Profit = MR = MC.
ASSIGNMENT
1. Compute MR (Module 2 Mon).
2. Compute MC (Module 2 Wed).
3. Write solutions and answers inside the table.

Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.