Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
C) Link between marginal cost and revenue and contribution
Full specification wording
Business objectives and pricing decisions: c) Link between marginal cost and revenue and contribution
Marginal cost (MC) is the cost of producing one extra unit, while marginal revenue (MR) is the revenue gained from selling it.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 3 of 3
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Marginal cost (MC) is the cost of producing one extra unit, while marginal revenue (MR) is the revenue gained from selling it. Contribution per unit is the selling price minus variable costs. The link between these concepts is vital for pricing decisions. If MR exceeds MC, producing the extra unit adds to total profit, meaning it generates a positive contribution towards fixed costs. For example, if a bakery's MC for an extra loaf is £0.50 and the MR is £1.20, the contribution is £0.70. A firm maximises profit where MC equals MR. Understanding this link helps businesses decide whether to accept special orders at lower prices, provided the price covers the marginal cost and makes a positive contribution.
What earns the marks
- Identify marginal cost as the addition to total cost from producing one extra unit.
- Identify marginal revenue as the addition to total revenue from selling one extra unit.
- Calculate contribution as the selling price minus average variable cost.
- Recognise that profit is maximised when marginal revenue equals marginal cost.
- Identify that a positive contribution occurs when marginal revenue is greater than marginal cost.
Common mistakes and how to put them right
Confusing marginal cost with average total cost.
Put it right: Marginal cost only considers the variable cost of the next unit, not fixed costs.
Assuming profit is maximised when revenue is highest.
Put it right: Profit is actually maximised where marginal cost equals marginal revenue.
Believing a firm should reject any order below its normal selling price.
Put it right: A firm should accept an order if the price exceeds marginal cost, generating a positive contribution.
Exam tips
- Always state the profit maximisation rule when discussing pricing and output decisions.
- Use numerical examples to demonstrate how a price above marginal cost provides a positive contribution towards fixed costs.
- Read multiple-choice options carefully to distinguish between marginal, average, and total values.
Try the lesson
The start of the Business objectives and pricing decisions: c) Link between marginal cost and revenue and contribution lesson, made from checked teaching notes for this specification point.
Have a go first
Which of the following statements accurately describes the relationship between marginal revenue, marginal cost, and the contribution of an additional unit of output?
Listen
Marginal cost (MC) is the cost of producing one extra unit, while marginal revenue (MR) is the revenue gained from selling it. Contribution per unit is the selling price minus variable costs. The link between these concepts is vital for pricing decisions. If MR exceeds MC, producing the extra unit adds to total profit, meaning it generates a positive contribution towards fixed costs. For example, if a bakery's MC for an extra loaf is £0.50 and the MR is £1.20, the contribution is £0.70. A firm maximises profit where MC equals MR. Understanding this link helps businesses decide whether to accept special orders at lower prices, provided the price covers the marginal cost and makes a positive contribution. A strong answer earns marks for these points. Identify marginal cost as the addition to total cost from producing one extra unit. Identify marginal revenue as the addition to total revenue from selling one extra unit. Calculate contribution as the selling price minus average variable cost. Recognise that profit is maximised when marginal revenue equals marginal cost. Exam tip: Always state the profit maximisation rule when discussing pricing and output decisions.
Key words
Say what each word means before you turn the card.
Marginal cost
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Marginal revenue
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Contribution per unit
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Profit maximisation
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See every definition
- Marginal cost
- The cost of producing one extra unit, considering only the variable cost of the next unit rather than fixed costs.
- Marginal revenue
- The revenue gained from selling one extra unit, being the addition to total revenue from selling it.
- Contribution per unit
- The selling price minus variable costs, showing what each unit contributes towards fixed costs.
- Profit maximisation
- The point where marginal cost equals marginal revenue, at which a firm maximises profit.
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