How to Calculate Economic Profit With the Marginal Decision Rule

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The marginal decision rule states that you should expand production if the price is greater than the marginal cost. Conversely, you should decrease production if the price is less than the marginal cost. Price refers to how much your revenue will go up from selling one more item, while marginal cost refers to how much your costs go up from selling one more. Calculating your profit will help you determine how to use the marginal decision rule.

  • Calculate your profit by subtracting the total cost of production from the total revenue. As an example, assume you run a small hockey stick manufacturing company, and your total costs are $10,000 and your total revenue is $20,000. Your profit is $10,000.

  • Determine the marginal cost of producing one more item. For example, the marginal cost of producing one more hockey stick is $25.

  • Determine the price of producing that one more item. For example, the price of producing one more hockey stick is $30.

  • Subtract the marginal cost from the price and add it to the profit. If the figure you add to the profit is a positive number, then you should expand production. In the example, you would subtract $25 from $30 and get $5. Because you would make $5 in profit by producing one more hockey stick, you should go ahead and expand production.

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