What is the difference between marginal costs and marginal revenues?

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Marginal cost and marginal revenues are similar in some ways. The term marginal implies that they are "additional" costs or revenues in a sense. Marginal costs are the additional cost each next item will cost to create, and marginal revenue is the additional income produced from each next item.

For instance, if it costs $2 to make one product but $3 to make two products, the marginal cost of the second one is $1. Additionally, if you earn $5 for every product you sell, your marginal revenue for the first will be different with each subsequent product. The difference between them is that marginal cost is the additional cost to produce each next product, and marginal revenue is the additional revenue generated by each additional product created.

The marginal revenue in the above scenario will be $3 for the first product (you earn $5, but it costs $2) and $4 for the second product (it costs $3 to produce, but you earn $10 total, which makes your revenue $7, which is $4 above the revenue for the first product sold).

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In order to answer this, we must first understand what “marginal” means.  In this context, it refers to the cost or revenue that comes about through the production and sale of the next unit of output.  In other words, it does not refer to all costs or revenues that a company has, but only those related to changes in what the firm is doing.  So, if I own a shirt making company and I decide to hire one more worker, the costs and revenues associated with that worker are my marginal costs and revenues with respect to that worker.  I do not need to look at all my costs and revenues, just those that have come about because I hired that worker.

Once this is understood, the rest is fairly simple.  Costs are the money that has to be paid out while revenues are the money received from selling products.  So, if I hire the new worker, my marginal costs will be things like the wages and benefits I pay them and the wages I pay to my administrative staff as they do the paperwork for hiring the worker.   The marginal revenues are the amount of money that I make over and above what I was making before the new worker was hired.

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