What Is the Marginal Average Profit Function?

by James Green; Updated September 26, 2017

The marginal average profit function describes how much more of a particular good a firm must produce on average in order to obtain an extra dollar of income. The function is a relatively common term in microeconomics, business economics and management studies. Firms use marginal average profit functions when analyzing desired levels of future revenue.

Total Profit

A profit for a company is a relatively straightforward concept. It is simply the total revenue of a firm minus its total costs. Total revenue is the amount of money earned from selling a certain amount of goods and services, and total cost is the cost of the inputs associated with that level of output.

Marginal Profit

Marginal revenue can be defined as the additional amount of revenue earned from selling one additional unit of a good or service. Similarly, marginal cost is the additional cost of producing one extra unit of a product. Mathematically, if we were given the equations for both total revenue and total cost, marginal revenue and marginal cost would be the derivative of each equation respectively. Marginal profit is thus marginal revenue minus total cost.

Average Profit

The average profit of a firm is the average revenue minus the average cost. Both average revenue and average cost is the total revenue and cost, divided by the number of units of a good produced. Both the total revenue and total cost of a firm varies with respect to the amount of output produced. Calculating the average revenue and cost therefore gives a single variable that does not change with output.

Marginal Average Profit

The marginal average profit is similar to the marginal profit, but instead of using total profit in the calculation, average profit is used. The marginal average profit is the change in average profit upon an increase in one additional unit of output. It is used by firms and enterprises in order to determine "break even" points. As costs continuously increase, and as revenue falls due to downward-sloping demand curves, marginal average profit must eventually reach zero at some point.