INTRODUCTION TO ECONOMICS - Economics serves as a tool that one can use in deciding the

amount of time to allocate for studying and leisure

Paul Samuelson and William Nordhaus (American Economists)
- the study of how societies use scarce resources to produce CHAPTER 1: THE NATURE, SCOPE AND PRACTICE OF MANAGERIAL
valuable commodities and distribute them among different ECONOMICS
people
Lionel Robbins (British Economist) Definition of Managerial Economics and its nature
- the science which studies human behavior as a relationship - One standard definition for economics is the study of the
between ends and scarce means which have alternative use production, distribution, and consumption of goods and services.
Gerardo Sicat (Filipino Economist) - Secondly, it is the study of choice related to the allocation of
- the study how individuals and society generally makes choices scarce resources.
that involve the use of scarce resources from among alternative - The first definition indicates that economics includes any
wants that need to be satisfied business, non-profit organization, or administrative unit.
- The second definition establishes that economics is at the core of
Three Fundamental Questions of Economics what managers of these organizations do.
1.) What to produce? - We use economics to examine how managers can design
2.) How to produce? organizations that motivate individuals to make choices that will
3.) For whom to produce? increase a firm’s value.
- This module discusses the economic concepts and principles
Scope of Economics from the perspective of managerial economics, which is a subfield
1.) Microeconomics of economics that places special emphasis on the choice aspect in
2.) Macroeconomics the second definition.

Positive Economics - it describes and explains economics phenomena Managerial economics

using various concepts and ideas of economics - is a branch of economics that applies microeconomic concepts,
Normative Economics - gives value laden statements about what should methods, and analysis to examine how an organization or
be done business can achieve its aims and objectives most efficiently
through decision-making.
Importance of Economics
- Leaders of the country use economic data to formulate programs Two different conceptual approaches to the study of economics:
and laws that would help in improving the state of the economy Microeconomics - studies phenomena related to goods and services
- Reports coming from government agencies as well as the from the perspective of individual decision-making entities that is,
opinions of the experts in the field households and businesses
- It can be used to understand events in the community and in the - is the field of economics that looks at the economic behaviors of
country individuals, households, and companies
 - The microeconomic approach is essential for understanding the Organizations that provide goods and services will survive and thrive
behavior of atomic entities in an economy. only if they meet the needs for which they were created and do so
effectively. Since the organization’s customers also have limited
Macroeconomics - approaches the same phenomena at an aggregate resources, they will not allocate their scarce resources to acquire
level, for example, the total consumption and production of a region. The something of little or no value. And even if the goods or services are of
microeconomic approach is essential for understanding the behavior of value, when another organization can meet the same need with a more
favorable exchange for the customer, the customer will shift to the other
atomic entities in an economy.
supplier. Put another way, the organization must create value for their
- takes a wider view and looks at the economies on a much larger
customers, which is the difference between what they acquire and what
scale–regional, national, continental, or even global
they produce. Thus, those managers who understand economics have a
- The macroeconomic approach provides measures and theories to
competitive advantage in creating value.
understand the overall systematic behavior of an economy.
- Managerial economics can be used to analyze and forecast the
Specifically, managerial economics deals with microeconomic reasoning demand for the product based on factors such as price elasticity,
on real-world problems such as pricing and production decisions in consumer preferences, and market trends. Managers can use
selecting the best strategy in different competitive environments. demand analysis to set optimal pricing strategies and allocate
resources effectively.
These business decisions can be analyzed through:
- The basic objective of managerial economics is to analyze
1. Risk Analysis
economic problems of businesses and suggest solutions and help
Various uncertainty models, decision rules, and risk quantification
managers in decision-making.
techniques are used to assess the riskiness of a decision.
- Managerial economics also plays a crucial role in strategic
2. Production Analysis decision-making. It equips managers with the tools and
Microeconomic techniques are used to analyze production efficiency, techniques to analyze market demand, assess costs, determine
optimum resource allocation, costs, and economies of scale, and to pricing strategies, evaluate risks, and understand competitive
estimate the firm’s costs of production. dynamics.
3. Pricing Analysis - Managerial economics is best defined as the economic study of
Microeconomic techniques are used to examine various pricing decisions how businesses can make the most profits.
including transfer pricing, joint product pricing, price discrimination,
1.3 Managerial Economics Is Applicable to Different Types of
price elasticity estimations, and optimal pricing methods.
Organizations
4. Budgeting
Investment theory is used to examine a firm’s capital purchasing The organization providing goods and services will often be called a
decisions. business or a firm, terms that connote a for-profit organization.

However, managerial economics is relevant to nonprofit organizations

1.2 Why Managerial Economics Is Relevant for Managers and government agencies. Although the underlying objective may change
We live in a world with scarce resources, which is why economics is a based on the type of organization, all these organizational types exist for
practical science. We cannot have everything we want. Further, others the purpose of creating goods or services for persons or other
want the same scarce resources we want. organizations.
Managerial economics also addresses another class of manager: the Key Takeaways:
regulator. The economic exchanges that result from organizations and - Corporate Social Responsibility (CSR) means that businesses
persons trying to achieve their individual objectives may not result in the should operate in ways that benefit society in addition to
best overall pattern of exchange unless there is some regulatory maximizing shareholder value.
guidance. - Socially responsible companies adopt policies that promote the
well-being of society and the environment while lessening the
Economics provides a framework for analyzing regulation, both the effect
negative impacts on them.
on decision making by the regulated entities and the policy decisions of
- Companies can act responsibly in many ways such as by
the regulator.
promoting volunteering, making changes that benefit the
1.4 Social Responsibility of Business environment, engaging in ethical labor practices, and engaging in
charitable giving.
Social Responsibility is an ethical focus for individuals and companies - Critics assert that practicing and endorsing CSR standards
that want to take action and be accountable for practices that benefit contradicts the purpose of a business which is to make money.
society.

- It’s become increasingly important to investors and consumers 1.5 Social Responsibility of Business and Social Contract
who want to put their money into or purchase products from Social responsibility of business implies that a corporate enterprise has
companies that take steps to contribute to the welfare of society to serve interests other than that of common shareholders who, of
and the environment. course, expect that their rate of return, value or wealth should be
In modern capitalist economies, business firms contribute significantly to maximized.
economic welfare. In today’s world the interest of other stakeholders, community and
In most cases, the economic actions of firms (spurred by the profit environment must be protected and promoted. Social responsibility of
motive) promote social welfare as well: business production contributes business enterprises to the various stakeholders and society in general is
to economic growth, provides widespread employment, and raises the result of a Social Responsibility of Business Enterprises towards
standards of living. Stakeholders and Society in General contract as shown in the figure
below.
The objective of value maximization implies that management’s primary
responsibility is to the firm’s shareholders. But the firm has
other stakeholders as well: its customers, its workers, even the local
community to which it might pay taxes.

Although the customary goal of management is value maximization, there

are circumstances in which business leaders choose to pursue other
objectives at the expense of some foregone profits. For instance,
management might decide that retaining 100 jobs at a regional factory is
worth a modest reduction in profit. Value maximization is not the only
model of managerial behavior. Nonetheless, the available evidence Social contract is a set of rules that defines the agreed interrelationship
suggests that it offers the best description of a private firm’s ultimate between various elements of a society. The social contract often involves
objectives and actions. a quid pro quo (i.e. something given in exchange for another).
 - In the social contract, one party to the contract gives something is the payment of fair wages to them and provide healthy and good
and expects a certain thing or behavior pattern from the other. working conditions.
- In the present context the social contract is concerned with the
The business enterprises should recognize the need for providing
relationship of a business enterprise with various stakeholders
essential labor welfare activities to their employees, especially they
such as shareholders, employees, consumers, government, and
should take care of women workers. Besides, the enterprises should
society in general.
make arrangements for proper training and education of the workers to
Social responsibility of business implies that corporate managers must enhance their skills.
promote the interests of all stakeholders not merely of shareholders who
3. Responsibility to Consumers
happen to be the so-called owners of the business enterprises.
Some economists think that the consumer is a king who directs the
1. Responsibilities to Shareholders
business enterprises to produce goods and services to satisfy his wants.
In the context of good corporate governance, a corporate enterprise However, in the modern times this may not be strictly true, but the
must recognize the rights of shareholders and protect their interests. companies must acknowledge their responsibilities to protect their
interests in undertaking their productive activities.
It should respect shareholders’ right to information and respect their
right to submit proposals to vote and to ask questions at the annual Invoking the notion of social contract, the management expert Peter
general body meeting. Drucker observes, “The customer is the foundation of a business and
keeps it inexistence.” He alone gives employment to meet the wants
The corporate enterprise should observe the best code of conduct in its
and needs of a consumer, the society entrusts wealth-producing
dealings with the shareholders. However, the corporate Board and
resources to the business enterprise.
management try to increase profits or shareholders’ value but in
pursuing this objective, they should protect the interests of employees, In view of above, the business enterprises should recognize the rights of
consumers, and other stakeholders. consumers and understand their needs and wants and produce goods
or services accordingly.
Its special responsibility is that in its efforts to increase profits or
shareholders’ value it should not pollute the environment. 4. Obligation towards the Environment:

2. Responsibility to Employees The foremost responsibility of business enterprises is to ensure that they
should not damage the environment and for this purpose they should
The success of a business enterprise depends to a large extent on the
reduce as much as possible air and water pollution by their productive
morale of its employees. Employees make valuable contributions to the
activities.
activities of a business organization.
They should not dump their toxic waste products in rivers and streams to
The corporate enterprise should have good and fair employment
avoid their pollution. Pollution of the environment poses a great health
practices and industrial relations to enhance its productivity. It must
hazard for the people and is a cause of several respiratory and skin
recognize the rights of workers or employees to freedom of association
diseases.
and free collective bargaining.
In economic theory pollution of environment is regarded as social cost
Besides, it should not discriminate between various employees. The most
that must be minimized. There is now a growing awareness towards
important responsibility of a corporate enterprise towards employees
reduction in environment pollution.
According to recent findings, climate change is occurring due to greater marginal product. Besides, there are harmful external effects that private
emission of carbon dioxide and other pollutants. Therefore, the enterprises do not consider when making their business decisions.
corporate enterprises should adopt high standards of environmental Therefore, there is an urgent need to make business enterprises behave
protection and ensure that they are implemented regardless of in a socially responsible manner and to work for promoting social
enforcement of any environment laws passed by the government. interests.

Many countries including India have passed laws to protect CHAPTER 2: ECONOMIC DECISION MAKING
the environment, but they are not properly and strictly enforced.
This chapter discusses the basic steps in decision-making and introduces
Business enterprises in their attempt to maximize profits recklessly and
profit maximization as a main goal of business managers. The readers will
negligently pollute the environment. Therefore, it is required that
be able to identify and apply the basic steps of decision-making to realize
government should take tough measures and enforce environment laws
profit maximization.
strictly if environment is to be protected.
The best way to become acquainted with managerial economics is to
5. Responsibility to Society in General
come face to face with real-world decision-making problems. Every
Business enterprises function by public consent with the basic objective decision can be framed and analyzed using a common approach based
of producing goods and services to meet the needs of the society and on six steps, as Figure below indicates.
provide employment to the people.
The Basic Steps in Decision-Making
The traditional view is that in performing this function businesses
The process of decision-making can be broken down into six basic steps.
maximize profits or shareholders’ value and doing so they do not behave
in any socially irresponsible way. Step 1. Define the Problem
According to Adam Smith whose invisible hand theorem is often quoted What is the problem the manager faces? Who is
that while maximizing their profits, businessmen are led by an invisible the decision maker? What is the decision setting
hand to promote the interests of the society. To quote him, “An or context, and how does it influence managerial
individual or business generally, indeed neither intends to promote the objectives or options?
public interest nor knows how much he is promoting it. He intends only
his own gains, and he is in this, as in many other cases, led by an invisible Decisions do not occur in a vacuum. Many come
hand to promote an end that was not part of his intention. By pursuing about as part of the firm’s planning process.
his own interest, he frequently promotes that of the society more Others are prompted by new opportunities or
effectively than when he really intends to promote it.” new problems. It is natural to ask, what brought
about the need for the decision? What is the
In the present world where there are monopolies, oligopolies in product decision all about? A key part of problem definition involves identifying
and factor markets and there are externalities, especially detrimental the context. Most of the decisions we study take place in the private
externalities such as environmental pollution by the activities of sector. Managers representing their respective firms are responsible
business enterprises, maximization of private profits does not always for the decisions made.
lead to the maximization of social benefit.
Step 2. Determine the Objective
In fact, in such imperfect market conditions, consumers are exploited by
raising prices much above the cost of production, and workers are What is the decision maker’s goal? How should the decision maker value
exploited as they are not paid fair wages equal to the value of their outcomes with respect to this goal? What if he or she is pursuing
multiple, conflicting objectives? When it comes to economic decisions, it elementary arithmetic suffices. For instance, the simplest profit
is a truism that “you can’t always get what you want.” But to make any calculation requires only subtracting costs from revenues. The choice
progress at all in your choice, you have to know what you want. In most between two safety programs might be made according to which saves
private-sector decisions, profit is the principal objective of the firm and the greater number of lives per dollar expended. Here the use of
the usual barometer of its performance. Thus, among alternative courses arithmetic division is the key to identifying the preferred alternative.
of action, the manager will select the one that will maximize the profit of
the firm.
MODELS
In practice, profit maximization and benefit-cost analysis are not always
unambiguous guides to decision-making. One difficulty is posed by the In more complicated situations, however, the decision-maker often must
timing of benefits and costs. Both private and public investments involve rely on a model to describe how options translate into outcomes. A
trade-offs between present and future benefits and costs. model is a simplified description of a process, relationship, or other
phenomenon. By deliberate intent, a model focuses on a few key features
Uncertainty poses a second difficulty. In some economic decisions, risks
of a problem to examine carefully how they work while ignoring other
are minimal. The presence of risk and uncertainty has a direct bearing on
complicating and less important factors. The main purposes of models
the way the decision-maker thinks about his or her objective.
are to explain and to predict to account for past outcomes and to
Step 3. Explore the Alternatives forecast future ones.

What are the alternative courses of action? What are the variables under Other models rest on statistical, legal, and scientific relationships. The
the decision maker’s control? What constraints limit the choice of construction and configuration of the new bridge (and its likely
options? After addressing the question “What do we want?” it is natural environmental impact) and the plan to convert utilities to coal depend in
to ask, “What are our options?” Given human limitations, large part on engineering predictions. Evaluations of test-marketing
decision-makers cannot hope to identify and evaluate all possible results rely heavily on statistical models. Legal models, interpretations of
options. Still, one would hope that attractive options would not be statutes, precedents, and the like are pertinent to predictions of a
overlooked or, if discovered, not mistakenly dismissed. Moreover, a sound firm’s potential patent liability and to the outcome in other legal disputes.
decision framework should be able to uncover options in the course of
Key distinction can be drawn between deterministic and probabilistic
the analysis.
models. A deterministic model is one in which the outcome is certain (or
Most managerial decisions involve more than a once-and-for-all choice close enough to a sure thing that it can be taken as certain) while a
from among a set of options. Typically, the manager faces a sequence of probabilistic model accounts for a range of possible future outcomes,
decisions from among alternatives. In view of the myriad uncertainties each with a probability attached.
facing managers, most ongoing decisions should best be viewed as
contingency plans.
Step 5. Make a Choice
Step 4. Predict the Consequences
After all the analysis is done, what is the preferred course of action? Once
What are the consequences of each alternative action? Should conditions
the decision-maker has put the problem in context, formalized key
change, how would this affect outcomes? If outcomes are uncertain,
objectives, and identified available alternatives, how does he or she go
what is the likelihood of each? Can better information be acquired to
about finding a preferred course of action? In most decisions, the
predict outcomes? Depending on the situation, the task of predicting the
objectives and outcomes are directly quantifiable. Thus, a private firm
consequences may be straightforward or formidable. Sometimes
(such as a carmaker) can compute the profit results of alternative price decision. In our earlier example of the bridge, businesses and commuters
and output plans. Analogously, a government decision-maker may know in the region can expect to gain, but nearby neighbors who suffer extra
the computed net benefits (benefits minus costs) of different program traffic, noise, and exhaust emissions will lose. The program to convert
options. The decision maker could determine a preferred course of utilities from oil to coal will benefit the nation by reducing our
action by enumeration, that is, by testing several alternatives and dependence on foreign oil. However, will increase many utilities’ costs of
selecting the one that best meets the objective. This is fine for decisions producing electricity, which will mean higher electric bills for many
involving a small number of choices, but it is impractical for more residents. The accompanying air pollution will bring adverse health and
complex problems. Expanding the enumerated list could reduce this aesthetic effects in urban areas. Strip mining has its own economic and
risk but at considerable cost. environmental costs, as does nuclear power. In short, any significant
government program will bring a variety of new benefits and costs to
Fortunately, the decision maker need not rely on the painstaking method
different affected groups.
of enumeration to solve such problems. A variety of methods can identify
and cut directly to the best, or optimal, decision. These methods rely to The important question is: How do we weigh these benefits and costs to
varying extents on marginal analysis, decision trees, game theory, make a decision that is best for society as a whole? One answer is
benefit-cost analysis, and linear programming. These approaches are provided by benefit-cost analysis, the principal analytical framework
important not only for computing optimal decisions but also for checking used in guiding public decisions. The benefit-cost analysis begins with
why they are optimal. the systematic enumeration of all the potential benefits and costs of a
particular public decision. It goes on to measure or estimate the dollar
Step 6: Perform Sensitivity Analysis
magnitudes of these benefits and costs. Finally, it follows the decision
What features of the problem determine the optimal choice of action? rule: Undertake the project or program if and only if its total benefits
How does the optimal decision change if conditions in the problem are exceed its total costs. Benefit-cost analysis is similar to the profit
altered? Is the choice sensitive to key economic variables about which calculation of the private firm with a key difference: Whereas the firm
the decision maker is uncertain? In tackling and solving a decision considers only the revenue it accrues and the cost it incurs, public
problem, it is important to understand and be able to explain to others decisions account for all benefits, whether or not recipients pay for them
the “why” of your decision. The solution, after all, did not come out of (that is, regardless of whether revenue is generated) and all costs (direct
thin air. It depends on your stated objectives, the way you structured the and indirect).
problem (including the set of options you considered), and your method
Much of economic analysis is built on a description of rational
of predicting outcomes. Thus, sensitivity analysis considers how an
self-interested individuals and profit-maximizing businesses. While this
optimal decision is affected if key economic facts or conditions vary.
framework does an admirable job of describing buyers and sellers in
2.1 Public Decisions: Economic View markets, workers interacting in organizations, and individuals grappling
with major lifetime decisions, we all know that real-world human
In government decisions, the question of objectives is much broader than behavior is much more complicated than this. Twin lessons emerge from
simply an assessment of profit. Most observers would agree that the behavioral economics. On the one hand, personal and business decisions
purpose of public decisions is to promote the welfare of society, where are frequently marked by biases, mistakes, and pitfalls. We are not as
the term society is meant to include all the people whose interests are smart or as efficient as we think we are. On the other, decision-makers
affected when a particular decision is made. The difficulty in applying the are capable of learning from their mistakes. Indeed, new methods and
social welfare criterion in such a general form is that public decisions organizations distinct from the traditional managerial functions of
inevitably carry different benefits and costs to the many groups they private firms or the policy initiatives of government institutions are
affect. Some groups will gain, and others will lose from any public emerging all the time. Philanthropic organizations with financial clout
play an influential role in social programs. Organizations that promote objective. Thus, a firm might aspire to a level of annual profit, say $40
and support open-source research insist that scientists make their data million, and be satisfied with policies that achieve this benchmark. More
and findings available to all. When it comes to targeted social innovations generally, the firm may seek to achieve acceptable levels of performance
(whether in the areas of poverty, obesity, delinquency, or educational with respect to multiple objectives (profitability being only one such
attainment), governments are increasingly likely to partner with profit objective).
and nonprofit enterprises to seek more efficient solutions.
A second behavioral model posits that the firm attempts to maximize
total sales subject to achieving an acceptable level of profit. Total dollar
sales are a visible benchmark of managerial success. For instance, the
2.2 Decision within Firms: Profit-Maximization
business press puts particular emphasis on the firm’s market share. In
The main goal of a firm’s managers is to maximize the enterprise’s profit addition, a variety of studies show a close link between executive
-either for its private owners or for its shareholders. This goal implies compensation and company sales. Thus, top management’s self -interest
that decisions that increase revenues to be more than costs or reduce may lie as much in sales maximization as in value maximization.
costs to be less than revenues, should be selected. This goal will be
A third issue centers on the social responsibility of business. In modern
analyzed using demand forecasting techniques, marginal analysis, cost
capitalist economies, business firms contribute significantly to economic
analysis, and pricing techniques which will be discussed in the following
welfare. Within free markets, firms compete to supply the goods and
chapters. Managerial economics is based on a model of the firm: how
services that consumers demand. Pursuing the profit motive, they
firms behave and what objectives they pursue. The main principle of this
constantly strive to produce goods of higher quality at lower costs. By
model, or theory of the firm, is that management strives to maximize the
investing in research and development and pursuing technological
firm’s profits.
innovation, they endeavor to create new and improved goods and
This objective is unambiguous for decisions involving predictable services. In the large majority of cases, the economic actions of firms
revenues and costs occurring during the same period of time. However, a (spurred by the profit motive) promote social welfare as well: business
more precise profit criterion is needed when a firm’s revenues and costs production contributes to economic growth, provides widespread
are uncertain and accrue at different times in the future. The most employment, and raises standards of living.
general theory of the firm states that “Management’s primary goal is to
The objective of value maximization implies that management’s primary
maximize the value of the firm”.
responsibility is to the firm’s shareholders. But the firm has
other stakeholders as well: its customers, its workers, and even the local
community to which it might pay taxes. This observation raises an
important question: To what extent might management decisions be
The firm’s value is defined as the present value of its expected future influenced by the likely effects of its actions on these parties? For
profits. Thus, in making any decision, the manager must attempt to instance, suppose management believes that downsizing its workforce is
predict its impact on future profit flows and determine whether, indeed, necessary to increase profitability. Should it uncompromisingly pursue
it will add to the value of the firm. Although value maximization is the maximum profits even if this significantly increases unemployment?
standard assumption in managerial economics, three other decision Alternatively, suppose that because of weakened international
models should be noted. competition, the firm has the opportunity to profit by significantly
raising prices. Should it do so? Finally, suppose that the firm could
The model of satisficing behavior posits that the typical firm strives for a dramatically cut its production cost with the side effect of generating a
satisfactory level of performance rather than attempting to maximize its
modest amount of pollution. Should it ignore such adverse environmental
side effects?

All of these examples suggest potential trade-offs between value

maximization and other possible objectives and social values. Although
the customary goal of management is value maximization, there are Marginal cost (MC) is the additional cost of producing an extra unit of
circumstances in which business leaders choose to pursue other output. The definition is:
objectives at the expense of some foregone profits. For instance,
management might decide that retaining 100 jobs at a regional factory is
worth a modest reduction in profit. To sum up, value maximization is not
the only model of managerial behavior. Nonetheless, the available
evidence suggests that it offers the best description of a private firm’s
ultimate objectives and actions.
In general terms, marginal cost at each level of production includes any
2.3 Optimal Decision Using Marginal Analysis additional costs required to produce next time. For instance, if producing
additional vehicles requires building a new factory, the marginal cost of
Marginal analysis is a method used to determine the optimal output level
those extra vehicles includes the cost of the new factory. In practice, the
that will maximize the firm’s profit; looks at the change in profit that
analysis is segregated by definition in long-run cases where marginal
results from making a small change in a decision variable. We will look
costs include all costs that vary with the level of production and other
once again at the two components of profit, revenue, and cost, and
costs are considered fixed costs. This concept will be discussed further
highlight the key features of marginal revenue and marginal cost.
in Chapter 6.
These marginal measurements not only provide a numerical value to the
Profit maximization of the firms will be realized when optimal output is
responsiveness of the function to changes in the quantity but also can
determined. Profit maximization assumes that there is some output level
indicate whether the business would benefit from increasing or
that is most profitable. A firm might sell huge amounts at very low prices
decreasing the planned production volume and in some cases can even
but discover that profits are low or negative. To avoid this, a firm should
help determine the optimal level of planned production.
sell output and charge a price at MR = MC. This condition is called the
The marginal revenue measures the change in revenue in response to a MR=MC rule. At this quantity, the slopes of the revenue and cost
unit increase in production level or quantity. The marginal cost measures functions are equal; the revenue tangent is parallel to the cost line. But
the change in cost corresponding to a unit increase in the production this simply says that marginal revenue equals marginal cost. At this
level. The marginal profit measures the change in profit resulting from a optimal output, the gap between revenue and cost is neither widening
unit increase in the quantity. nor narrowing. Thus, maximum profit is attained.

Marginal measures for economic functions are related to the operating

volume and may change if assessed at a different operating volume level.

Marginal revenue (MR) is the extra revenue that an additional unit of

product will bring to the firm. It can also be described as the change in
total revenue over the change in the number of units sold (from Q0
to Q1). This can be expressed as: