Egt1 Task 1 Essay

3703 words - 15 pages

Economics and Global Business Communications

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Competency 309.1.1: Marginal Analysis

A.1. Profit maximization is the desire and target of all trading companies that operate in various industries, in different markets (Taylor & Weerapana, 2012). They must first of all produce products for sale to achieve the same. This production results into various financial costs that have to be overcome with the revenue from the sales. The difference between the total revenue and total costs becomes the profit to the firm. The total revenue to total cost approach is, therefore, concerned with maximizing the difference ...view middle of the document...

Marginal cost refers to a change in total cost that is realized after the production of an extra unit of a product. It implies that the producer has to incur an additional cost to add one extra unit to the ones already produced in the firm. It is calculated or obtained by dividing the value of total variable cost of production by the quantity of the products produced in a firm. It implies that the firm has to incur two costs of production, which are the fixed and varied costs. As in this scenario, Company A incurred a fixed cost of $10 without having produced a single item.

Marginal costs increases in the event that production of extra units of a product requires the firm to invest additional resources. Here, the firm has to ensure that the factors of production are added to enhance the production. The increase only relates to the varied costs since the fixed costs are assumed to be inflexible throughout the production process. The marginal costs will decrease in the event that production of extra units does not require additional resources. In the case of Company A, the marginal cost may decrease if the production has not reached the full capacity. Full capacity in this context refers to a situation where the available resources are still able to produce additional resources without requiring further or new investments (Taylor & Weerapana, 2012). Constant marginal costs imply that the Company A shall be producing extra units of products on top of the total quantity in this scenario without having to add on resources. It implies that the marginal cost incurred in the production of the first extra unit shall be uniform till the end of production of the required products by the firm.

D. Company A maximizes its profit when it produces a quantity of 7 units of output because, at this point, it has a profit of $540, which is more than in any other scenario. There is also a point where the profit is $540 but after producing 8 units. It is seen to be of no use to produce eight units and still make the same profit like the case of producing 7 units. The argument here is that producing seven units takes less time and effort, as opposed to 8 units. Therefore, the point of profit maximization is where the firm manages to acquire a profit of $540 after producing and selling 7 units of output.

E. The main reason behind production and selling of products is to make profits, which enhances sustainability of the firm. If the marginal revenue is high then the firm has to respond by adjusting its production activities upwards. It means that it has to continue producing additional units to capitalize on the marginal revenues. According to McEachern (2012), an increase in the marginal revenues has a tendency of increasing the profit margins of the firm thus enhancing profitability.

F. In the event that the marginal cost is more than the marginal cost the firm should respond by lowering the quantity of...

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