Deciding on Output and Price

Firms, when they decide how much to produce and at what price each will sell, use an approach called marginal analysis. This term has been borrowed from the derivative concept in calculus. 'Marginal' means the additional. So if they want to identify the level of output and prices that maximize profit, they would calculate the marginal revenue (MR) or the additional revenue earned per unit sold and equate it with marginal cost (MC) or the additional cost incurred for every unit produced. The argument is that if MR > MC firms believe that producing more would bring in more profits and if MC>MR losses are underway even at its per unit calculations. Thus when MR=MC firms already got the idea that the additional revenue is just enough to cover the additional cost incurred and thus per unit wise, marginal profit is zero. The computed profits in its entirety defines the maximum profits.

Marginal as in MR and in MC do not have the same meanings with averages as in average revenue (AR) and average cost (AC). What makes the differences. See http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm for a clearer explanation.
Also look at this link for practice http://wps.prenhall.com/bp_ayers_micro_1/0,7011,487128-,00.html and
http://www.investopedia.com/articles/03/012703.asp

Terms to understand:
1. profit maximization
2. total profit, total cost and total revenue
3. economic profit and zero economic profit
4. marginal revenue and marginal cost
5. economies of scale
6. average cost and average revenue