Marginal Analysis Approach on Cost, Revenue, and

Profit
Marginal Analysis or the analysis on additional revenue
(MR) and the additional cost (MC) incurred from the
production of an additional unit of output (Change in
quantity) shall be compared to arrive at maximum profit.
Marginal Revenue (MR) is the additional revenue from an
additional unit of output
Marginal Cost (MC) is the additional cost in producing one
unit of additional output.
MC > MR
MR = MC
Average Cost
AC =

TC( X)
X

AC = Average Cost
X = units of products
TC(x) = total cost of producing x units of product
Characteristics of a total cost function and x
1.Total Cost Function TC(x) and x should always have
positive values.

2.Total Cost is zero or positive (TC > 0) when no units

produced.
3.Total Cost increases as x increases so that TC (x) is
always positive
[TC (x) > 0]
Example: Find the average cost if the total cost function is
TC = x 2 + 20x + 400
TC ( X) X +20 x +400
AC =
=
X
x

AC =x +20+

400
X

Find the average cost at x = 10

AC =x +20+

Marginal Cost

400
X

10+20+

400
10

= 70

Marginal Cost defined as the rate increase in total cost

with respect to the rate increase in output. That is, if output
is increased by an amount of x from a certain level x and if
the corresponding increased in cost is y, then the average
increased in cost per extra item produced is
The marginal cost is:

lim

x 0

x
y

x dy
= =T C' (x )
y dx

Marginal Cost is the derivative of the total cost function

with respect to the quantity produced.
th

MC = TC (x) = cost of producing the ( x + 1 ) unit

Example: Find the marginal cost of the total cost function
TC = x 2 + 20x + 400
MC = TC (x) = x 2 + 20x + 400
MC = 2x + 20
Find the marginal Cost at x = 10
MC = TC (x) = x 2 + 20x + 400
MC = 2 (10) + 20
MC = 40